As an investor, finding and closing on a deal is only the beginning, and it sets the tone for how the rest of the deal will go. So what criteria should you have to make finding a profitable deal easier? Once you find a deal that’s promising, how do you do your due diligence before submitting an offer? In today’s episode, Kenneth Donis shares his bulletproof process for finding and underwriting profitable deals.
Ashley:
This is Real Estate Rookie episode 200 and niner.
Kenneth:
So people are realizing that there’s something going on in the economy. So I think it’s bringing fear to the market. Kind of what we’ve been doing is just trying to educate, because if you keep your money in the bank right now, it’s not making anything, it’s actually losing money, if you want to be, technicalities. Also, if you put it in stocks, I mean that would be very fearful. I would be scared to do that. And then crypto, I mean, that would be another thing that I would say was probably not the best idea. So where is the best place to put the money? I personally would say, and this might be biased, but I think it’s real estate just because it would hold its value, at least to an extent.
Ashley:
My name is Ashley Kehr, and I’m here with my cohost, Tony Robinson.
Tony:
And welcome to The Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and education you need to kickstart your investing journey. Now, usually I kind of start this part of the episode with reading some highlights from recent reviews that we’ve gotten on the podcast, but today I’m going to switch it up just a little bit, and I want to read some comments we got on YouTube for one of our recent episodes we put out on YouTube. And in that episode, Ashley and I talked about how one of the reviews talked about how boring Ashley and I are, and we like to read some of the bad reviews from time to time as well. And we just so much appreciated how the rookie community came to have our back.
So someone said, I love their chemistry, I also love the rookie podcast because every guest provides tangible lessons learned. Someone else said, imaginary. Derek said, I love you guys and you’re genuine chemistry. The show is amazing and extremely helpful. Please invite me to the next pool party. Someone else said, I love Ashley’s laughing. It’s so genuine. Please don’t stop due to negative reviews. You seem so much fun. And the last one, this one is from Paul Garza says, don’t change. I learn from your intro. I like to hear what you guys are personally working on. Makes me think of different situations and angles. So guys, we love that you appreciate the boring banter between me and Ashley. And I love that we now have a new name for the intro of the podcast, the boring banter. So why don’t we get into some for today, Ashley, what’s new with you? Give me some boring updates.
Ashley:
Well, first of all, I want to say, I love you guys so much and thank you. Those really warmed my heart, reading those messages. And even if everybody hated my laugh, I cannot make it go away. I can’t help it. So thank you guys. We really appreciate you guys taking the time to make those comments for us.
Tony:
So what’s new, Ash? Give me some boring banter about Ashley Kehr’s universe these days.
Ashley:
Well, I’m super excited because Tony and I are headed to Denver, where we are going to do a podcast recording together, live in person, and then we are also hosting a meetup in Denver, so that is going to be August 15th. I’m not sure when this episode is airing, before or after, but if you guys were there, it was great to see you. I think this will come out after and then, but yeah, it’s always great to get together with Tony and Sarah. And then after that headed to Tony’s short-term rental conference. And then it will be BPCon, so super excited for it to be in sunny San Diego this year. So if you guys haven’t checked it out, go to biggerpockets.com/events, and hopefully we’ll see you there.
Tony:
Lots of travel, lots of good things happening. I guess the only update that I have on the business side is that we’re, the city that we invest in, actually, I think we did this for Rookie Reply about the permit changes for some of the cities we invest in.
Ashley:
Yeah. In Josh [inaudible 00:03:36].
Tony:
Yeah. So that’s causing us to kind of adjust our game plan, but there’s a lot of folks who are now, and this has always been the case of short-term rentals, people that are afraid to invest in cities where the regulations are a little bit more stringent, but honestly, I’ve never seen that as a bad thing, if anything, it just kind of weeds out some of your competition. So it means there’s less people that are going to be looking to buy, which means, A, you have a little bit more leverage when you’re purchasing properties and then, B, when you’re actually operating, obviously there’s less short-term rentals. That means there’s less supply, which means there’s potentially opportunity for you to charge more and higher prices, so.
Just another day in life of a short-term rental host, but trying to keep things moving. But anyway, we got a good guest today, right? So this is the end of the trilogy. We have Kenneth Donis and we’ve had all three of the Donis brothers on the podcast. So we have them together in episode 175. So Kenneth, Jeffrey, and Kerwin all came onto that episode together. And then we’ve been bringing each brother on separately to kind of talk about their specific parts of the business. So again, they were all together on 175, then Jeffrey was on episode 193, Kerwin was 199, and then we finish off today with Kenneth on 209. Kenneth, welcome back to the podcast, brother, excited to have you on kind of finishing out the trilogy of the Donis brothers. How you been, man? How you doing?
Kenneth:
I’m doing well, man. Thank you guys so much for having me. How are you guys doing?
Ashley:
Good.
Tony:
Man, trying to keep up with you. You and your brothers just travel all over the place. I see you guys posting pictures at this conference and that conference and seems like you guys are out there networking and making connections, man.
Kenneth:
Yeah, absolutely. We definitely try to have fun with it, trying to meet a lot of people. In this business it’s really about who you know, not what you know. Well, I would say it’s about what you know too, but definitely a lot more on who you know, so.
Ashley:
Kenneth, before we get into this episode anymore, can you just give a little bit of information about yourself and what you’re doing in real estate right now? Just in case somebody didn’t listen to your previous episode.
Kenneth:
Yeah, absolutely. Well, like they said, and thank you, Tony, for the introduction, Kenneth Donis here. One of three of the Donis brothers. I’m Head of Marketing for our company, Donis Investment Group. Currently we have a little north of a thousand units in our portfolio right now, looking to acquire some more. So we’re slowly growing, but yeah, thank you guys so much for having me.
Ashley:
And Kenneth, let’s break that down because I don’t want everybody to think that we brought on some expert who’s been doing it for 20 years and has built up a thousand units, and not to say you’re not an expert, but just tell everyone how long you’ve been doing this and how exactly you acquired those thousand units?
Kenneth:
Yeah. So my brothers and I started in real estate wholesaling a few years ago and we’ve been at multi-family for going on two years now. So it’s been a slow burn, but we’ve been able to be co-sponsored on a few deals alongside some of our partners we’re in a bigger mastermind group called Think Multifamily, so we definitely give a big shout out to them. That’s pretty much how we’ve been able to be a part of bigger projects, to be quite honest.
Ashley:
Okay. So let’s break that down a little bit. And confirm or deny this if I’m explaining this correctly. So within that group of people or other people that you’ve partnered with, you have either brought the deal or you’ve provided some kind of value to be a general partner in the deal. So it’s not like you’re going out and you’re just taken down a thousand units, the three of you by yourself, but you are strategizing as to how you can provide value and to get a piece of the pie. Is that correct?
Kenneth:
Yes, that is correct. So in this business, what we came to learn is in multi-family it’s really a team sport and in team sports you have different people that play different roles in different positions. So in different various of acquisitions that we’ve had we’ve helped out with different things. So yeah, I mean, it’s just a bunch of, pretty much, partners and we all have our own role and we all have our respective areas in which we can help out.
Ashley:
Kenneth that is great. Realizing, so young and so new into real estate, investing is leveraging those partnerships and obviously it’s turned you guys into experienced investors. You’ve built up a large portfolio and you’ve made tons of connections. Today, we want to focus on your piece of your company though, the marketing and the acquisitions, so let’s kind of start there. What’s the first thing you want to go over today, that is part of your job role?
Tony:
Sorry, Kenneth, really quickly before you jump into that. If you can, just for the listeners that aren’t yet familiar with the phrase syndication, just give us a quick rundown of what that is and then lean into to the part that you focus on.
Kenneth:
Yeah, absolutely. So basically the word, syndication, is just gathering money and then going out and buy something. So in this case, apartment syndication, so we’ll go out, gather the equity. Of course, we’re taking debt on these properties. So we’ll go out and gather the equity in order to buy apartment complexes. And then, of course, our investors that invest with us, they get a return on their investment or the money that they put into the deal, so that’s just kind of what it is in a nutshell. What I do is I’m Head of Acquisitions, so I am the one underwriting. Well, first off, meeting with brokers, getting deals, underwriting deals, touring the deals, pretty much all upfront, trying to find a deal, trying to find an opportunity in which we can provide our investors.
Ashley:
So the majority of these deals, are you guys the ones that are finding them and then bringing them to other people that are already general partners on a deal to build a team, and how are you selecting as to who you take your deal to?
Kenneth:
Yeah. So, like I said, in this group, we have been co-sponsors, meaning that we’ve helped out on various other items. So we’ve had other partners that actually found the deal. We’re actually working on our first deal that we’re working on that we found, or I found, in Atlanta. But as far as how we figure out what to take to our investors, well, first off, we go by market, we just want to… We have a buy box, right? So it’s kind of the similar to single family. You can look at every single multi-family apartment, but I mean, there’s so many of them that it would be too broad. So you have to narrow it down to what you’re looking for and what you would be willing to, I guess, put up with, right? So, one, the market, so whether you want to invest in a tertiary market, meaning it’s not as populated, it’s a little bit smaller, maybe not as much activity.
Or a primary market, something like Charlotte or Dallas, or like a larger market, that’s a little bit more competitive, but obviously they have steady rent growth, steady job growth. And then you go into looking into the asset itself. So do you want to invest in a little bit older assets, ’60s, ’50s product, and either, usually with those products, there’s sometimes a lot of problems with like plumbing and electrical, just because everything’s so old, or do you just want to do newer assets? Things that were built in the 2000s or late 1990s. So that’s kind of the buy box. Now, it also depends on how many units you would like to acquire. So if you’re syndicating, you could pretty much syndicate any amount of units, but obviously the more units you have, the larger the purchase price will be. So depending on your capacity or if you’re just buying it yourself, you can buy a few units and, or continue to buy larger, a hundred plus, 200, 300 units. So I think narrowing it down is very important.
Ashley:
Kenneth, how are you creating that criteria? So for example, part of your criteria is it must be at least like a hundred doors or something like that. How did you come up with that number? What’s, if someone out there is looking to go and do multi-family, how can they be like, okay, I know that I can maximize my return if I’m getting over a hundred units or I want to be in a B to A-class market. What are some tips and tricks you can give to people to help them actually define what their criteria is going to be, instead of just saying, oh, I know that I want luxury units? What’s the best way they can actually figure out where they’re going to get the best return?
Kenneth:
Yeah. Great question. And I think, I like to say, honestly, if the numbers make sense, I think any deal is a good deal. So if it’s a good deal, I think, doesn’t really matter about the unit size. Obviously the larger, the better, because you get a little bit economies, the scale, meaning you’re not spending more per unit, so you have a certain threshold as far as expenses, so a certain amount of units cover your expenses, if that makes sense? So after you surpass a certain threshold within the unit sizes, you’re not really increasing the amount of expenses, so you’re just making more profit. But I would say, it really depends on your situation.
If you think you have, if you’re an executive that is in a large corporation or a large company and you have a network of people that are making 100, 200, maybe more, thousand dollars a year, there’s a potential for you to be able to syndicate a lot of money and therefore you can go out and buy a larger asset. But if that’s not your case, if maybe you’re just at your job and maybe you’re not surrounded by people that are a little bit higher-net-worth, you can go out and buy a smaller apartment complex or a quadplex or a duplex. So it really depends on your own situation. That’s what, at least, what I would say, but it’s all down to the numbers, right?
Ashley:
So the first thing you would say to look at is what is your budget, almost. So if you’re going to be doing a syndication, if you’re going to be raising money, how much money can you raise if you’re going to be borrowing private money? How much is that? If you’re getting bank financing. How much do you believe that you’ll be able to get for a property and then kind of look at what the average cost is for that many doors. And this all applies to even single family homes or duplexes too. So you can narrow your criteria, your buy box, to look at properties that are within your budget.
Kenneth:
Exactly.
Ashley:
And then also you mentioned too, how many doors are going to cover your expenses? So look at the overhead. So if you have a property that has 20 units and it’s going to cost you X amount to have the driveway snow-plowed, but you can look at a property that has a hundred units but it’s still going to cost the same because it’s the same size driveway, or something like that, to have it plowed. I think that’s also, that’s great advice right there too, is to look at what is the overhead of the expenses where they’re most likely not going to change as those units increase.
Kenneth:
Yes. That is a hundred percent correct. And to touch on your first point. So it’s not just, I would say not really just your budget. I would also say, like I said, this apartments is really a business in which it’s who you know, because I personally don’t have the net worth or the liquidity in order to sign and qualify for these loans but I have a network of people that can sign on these loans and they have the experience, they have the net worth, they have the liquidity.
So, if you surround yourself or go out and meet people that can KP or basically be a key principle and sign on these loans or they could tell you, hey, I can write a cheque for, I have investors that can write a cheque for 10 million or whatever the amount, 1 million. So it’s also about who you know. So if you can, not necessarily how much money you have or your direct… Not exactly just how much money you have directly, but how much money around the people that you know have, and, or their net worth, pretty much.
Ashley:
Isn’t it funny, at least for me growing up, I was always taught, never co-sign for anyone, never co-sign on an auto loan. And now, as investors, we want to be the person that eventually co-signs for a $10 million to loan for a property. But yeah, it’s just funny how that changes.
Kenneth:
Yeah. I, a hundred percent, agree. And the reason is because, one, this is good debt, right? So this debt, as long as the asset keeps performing, that debt that you’re taking out is making you money, right? So we’ve always been taught, obviously car loans, house, depending on your perspective, those might not be the best kind of debt. And two, you get a slice of the pie for just signing on the loan. And I mean, yes, it’s somewhat of a risk, but these are all a majority non-recourse debt, meaning that as long as you’re not committing fraud and, or just operating the property correctly and you’re not doing anything that would pretty much trigger a bad boy carve-out, they can’t come after you personally. So you’re using your balance sheet and there’s, I would say, I wouldn’t say that there’s no downside or no risk, but there’s very minimal risk, I would say. So that’s why people do it.
Tony:
Yeah. So Kenneth, you’ve done a great job, but I just want to kind of like rephrase it, that way people would see it a little bit more clearly. So what are all the things that should go into someone’s buy box? So you talked about like number of doors, you talked about condition. What are the other few pieces someone should really narrow in on when they’re talking about their buy box?
Kenneth:
Yeah. So area, I’d say median household income, number of doors, which would kind of correlate with purchase price. So I think those kind of go hand in hand. Year built and yeah, those are pretty much, I would say are… And crime, but I think that kind of goes hand in hand with the area and stuff.
Tony:
So, I mean, and obviously you’re looking at price as well, right? You know that, hey, I’m not going to buy a property that’s a $100,000, I’m not going to buy a property that’s $100 million. So how are you determining what price point that you’re going after? Because since this is a syndication, obviously you don’t have the money in the bank today. So it’s like, how do you know what’s a reasonable price point for you to get under contract that you can then go out and raise money for?
Kenneth:
Yeah. Great question. And I think, so we kind of have an understanding as to, in our network, how much money we could put together if we had a deal that checked all the boxes, pretty much so to say. So if it’s in a great area, there’s job growth, population growth, the median household income is good, the asset is not old, doesn’t necessarily need a lot of work, there’s not a lot of crime. So if it checks all the boxes, what can our partners, some of our partners or the people that we know, how much money do we think we could bring to the deal? So that’s kind of what we look at first because, obviously, we’re bringing the equity, you’re raising the equity so that you can get the loan. And that’s kind of how we kind of reverse engineer to see, okay, well, this is our maximum purchase price, or at least this is where we feel comfortable.
Tony:
So there’s always the issues to you, Kenneth, with soft commitments, like soft commitments versus money wired, right? You can have one money for the soft commitments, but it’s going to be a different number when the money actually gets wired in. So what kind of buffer do you typically kind of look for? Right. It’s like, I don’t know, say for example, you’re buying a property and, we’ll just use round numbers, so it’s easier, but say you’re buying a property that’s a million dollars and say that your down payment and what you need comes out to, I don’t know, $400,000, what you need to close and execute your business plan. How much would you want to see in soft commitments before actually getting that property under contract to make sure that you can close on it?
Kenneth:
Yeah. I would say probably close to double. Well, I wouldn’t say double and that’s because… Yeah, I’d probably say maybe like three-fourths more, so let’s say like 600, likely. So we have a little bit extra that’s, I think that, that would be a safe, comfortable number.
Tony:
Okay. And then one last question on the money raising piece, we can keep moving. So given where the market is at today, I think there’s a lot of fear and uncertainty amongst some investors. Some people understand that this is a good time to buy because there’s less competition. Other investors are a little bit more frightened. How is the current market cycle impact, A, your underwriting in general, but then, B, your ability to go out there and raise the funds that you guys need?
Kenneth:
Yeah. So two huge things that just come to mind. A few, I’d say like six to eight months ago, we were getting 75, 80% leverage on, pretty much all day, on any asset that we were looking at, as long as the area was a good area. Nowadays, we’re getting quoted 65% leverage, 65 to 70% leverage, which obviously means that you need to raise more money. And then I would also touch on with everything going on in the pullback that we’ve seen in stock market, crypto and people, it’s an obvious that what, I don’t know if it was obvious, but I would say a lot of people are starting to realize that there’s less loan applications being applied for, I guess, for people in search for homes. And this is because interest rates are going up and that therefore correlates with the amount that you’re going to be paying per month.
So people are realizing that there’s something going on in the economy. So I think it’s bringing fear to the market. So I think kind of what we’ve been doing is just trying to educate, because if you keep your money in the bank right now, it’s not making anything, it’s actually losing money, if you want to be technicalities. Also, if you put it in stocks, I mean that would be very fearful. I would be scared to do that. And then crypto, I mean, that would be another thing that I would say is probably not the best idea. So where is the best place to put the money? I personally would say, and this might be biased, but I think it’s real estate just because it would hold its value, at least to an extent.
Tony:
Yeah. Just one follow up on that.
Kenneth:
Yeah.
Tony:
Can’t remember which hedge fund it was. It was either Blackstone or one of those big hedge funds. And they recently announced that they raised $30 billion for a real estate fund they’re going to be launching here shortly. And I think that was like one of the biggest raises they’ve done when it came to real estate. And one of their big selling points was that real estate is one of the best hedges against inflation. And I think that’s why there was so much interest and why they were able to garner so much investor capitals because real estate is one of the best ways to make sure that your capital, at least paces with, but can oftentimes outpace the rate of inflation.
Kenneth:
A hundred percent. I definitely agree. I mean, there’s a lot of different asset classes or investment vehicles that you can pretty much invest in, but we’ve, especially now, we’re all starting to realize, well, I guess I kind of knew this, but a lot of people are starting to realize that they aren’t as secure as you would think. And so there’s all this money that is now starting to be pulled out of these markets and they’re sophisticated enough to know that they don’t want to just leave their money in the bank. So they’re all chasing after an asset class that has been proven to pretty much beat inflation year by year.
Ashley:
Yeah. The only thing I would add to that is with putting money into the stock market, I think that if you are going to hold your money in the stock market for a long time, now could be a great time because if you look at the 30-year history of the stock market, especially index funds. Pretty much all my stock market money is in Vanguard Index Funds. And I still think that’s a great way to diversify if you don’t need your money within the next maybe several years, I think that you can see some growth there. But still 100%, real estate is still my favorite investment strategy that there is because you have so much more control over it.
Kenneth:
I agree. I mean, you don’t take a loss until you sell, right? So.
Ashley:
Yeah. So Kenneth, now that we’ve kind of talked about what your buy box is, your criteria. What is the next step? You find a property that fits that criteria, what happens next?
Kenneth:
Yeah. So there’s a underwriting process and a lot of people can do this on back of the napkin kind of thing, but we usually use an analyzer. So we go through our analyzer, we analyze the deal. There’s a lot of steps, I guess you could say, that you would want to go through and check out to make sure that these numbers make sense.
Ashley:
Kenneth, so when you mention your analyzer, is this like a software? Is this like a spreadsheet you guys put together? What exactly is that?
Kenneth:
It’s a spreadsheet. And like I said, I’m a part of a group. So the group actually built a spreadsheet. I could be biased when I say this, but I think that I’ve seen several spreadsheets and I think that this is the most in depth spreadsheet out there. And like I said, I’ve seen a few of them. I haven’t seen all of them, so that might be a biased thought. But I would say, obviously we want to look at the comps, see what other comparable properties, similar vintage, similar area, what they’re renting for and what condition their units are in. So obviously if you see this property and it’s ’80s build, let’s say, but it isn’t renovated, let’s say, but you see other properties that are similar in ’80s vintage in the same area that have grander countertops, new flooring, new cabinets, paint, the whole nine, but they’re getting $200 more.
Well, we can obviously tell that this subject property is not achieving those rents because they’re not in the same condition, but we can also conclude that if we went in and did the same renovations, we can likely get that same rent bump, so that’s kind of what we look into. So the rent comps. We also want to make sure that we get quotes. Several, there’s a several, a checklist. So we want to make sure that we get quotes from our insurance company, because you can take a guess as to what insurance will be, but I think most insurance companies provide free soft quotes, which they can, they’re pretty accurate. So it doesn’t take them that long either. So you would want to get an insurance quote to see what you’ll be paying an insurance.
We usually like to either consult a tax consultant because taxes can be very tricky depending on what county and they change in every county. Some counties they freeze, some counties they reassess on sale. It’s different all over the place. So there’s not like one strategy. So a tax consultant is what we usually like to do, but you could call your tax office and just kind of ask them, a historically, how do they appraise and what their millage rates are, which is just kind of what they assess.
Ashley:
So you’re talking about like calling the assessor’s office?
Kenneth:
Yeah, exactly. And they can pretty much provide guidance, but we just like to be pretty accurate with our numbers.
Tony:
Kenneth, one follow up question. I’ve actually never heard of a tax consultant when it comes to identifying property taxes. Usually what we do is we just call the county of the city or whatever. Where do you find this tax consultant? Is there like a website where folks do this? Or is it like just, yeah. How do you find this person?
Kenneth:
Yeah, well, I was put in touch, so like I said, that’s the good thing about being in a group, I guess that kind of has already people that they’ve used in the past. But I’m sure you could just Google tax consultant or tax assessor consultant then I’m sure that there’s, there’s tons of companies out there that just specialize, especially in certain areas. You would just want to make sure that, obviously, that person that you’re consulting is familiar with the tax in that county because if they’re not, like I said, it can change in counties and in each state there can be tons of counties, so. Yeah.
Tony:
Ashley, have you ever used a tax consultant or do you typically just reach out to the county assessor’s office too?
Ashley:
Yeah, just the assessor’s office.
Kenneth:
Yeah.
Tony:
Yeah. Interesting. All right. Sorry, Kenneth, didn’t want to get you off track, but I just wanted to [inaudible 00:27:23].
Kenneth:
No worries.
Tony:
So continue.
Kenneth:
And the reason we do that is, well, yes, to get a better accurate representation as to what the property taxes will be. Because if you’re in this, whenever single family, obviously you’re holding for long-term, but in the value on a multi-family property is what it produces an income. So if you’re incorrect about your numbers, that can negatively affect or positively affect your valuation. So we just want to make sure we’re as accurate. And also once you hire one, they can also try to pretty much appeal the assessment. So that’s kind of usually you use a tax consultant to appeal or go to the county and just appeal on your values so that they can lower your taxes. But yeah, so I guess the next thing on the list, we like to consult our local property management company.
So although we are, I would say, experts in the areas that we’re investing in, no one knows that area better than usually our property management companies. So we usually like to build relationships with property management companies that are in those areas that we’re investing in so that when we find an opportunity, we can go to them and they could potentially, they can provide us a budget for expenses, what similar properties of similar vintages and in this similar area are running at. For example, what they’re spending on marketing or payroll, things like that, because they know that market better than most people because they usually manage lots of units in that area. And also what they think based on the comps, what they think rents could be pushed to and what renovations you would need in order to achieve those rents. So I think, and we rely heavily on our property management company.
Tony:
And let me ask just one clarifying question, Kenneth. You’re running through a lot of really, I think, beneficial things to do, but are you doing all of this before or after submitting your initial offer to the seller, to the broker?
Kenneth:
Yeah. So this is all before we submit an offer. And the reason why is because in this business, it’s all about reputation and people, there’s a term called retrading, which basically means you go back and try to ask for a discount. And if you do that without, obviously, if you go in and do due diligence and find that there’s foundation issues and no one knew, or termite damage, for example, no one even knew that there was termite damage, then you need a discount because you need to repair that. But if it’s just because you didn’t do your numbers correctly, you’ll get a negative connotation to your name and it’s not really, it’s very frowned upon in this space.
Tony:
Gotcha.
Kenneth:
So we just want to make sure we have all of our ducks in a row, so that when we submit an offer, we don’t have to go back and try to get a discount for something we should have already kind of looked at.
Ashley:
Kenneth, how long does this initial checklist for underwriting take you? To get an insurance quote, to talk with your property management company. What’s an average timeframe? So if you think of an investor right now, or the past year, not even right now, going after single family or duplex, especially on the MLS, it’s like you have to analyze that deal that day. So what is kind of the timeframe look like for multi-family doing the underwriting?
Kenneth:
Yeah. And this depends, obviously, on various factors. Unfortunately, you have to depend on other people who are also very busy and are probably receiving tons of deals, especially now. But I would say, usually, I mean the initial underwriting, which I do, I guesstimate most of these numbers before I go to insurance, property management or a tax consultant. So I try to find those numbers for myself and just see, usually because I know the area and the market and things like that, usually they’re not too far off.
So if they don’t even pass that first, I don’t even go to that step. But once I do send it out to them, I’d say it takes anywhere from four days to a week for them to get back. Usually the, it depends on how much time we have, but on these deals it’s not like you’re buying, it’s usually pretty hefty of a price, so usually you have a lot of time to submit an offer. So I’d say usually they’re on market for at least a few, I’d say minimum two weeks, most of the time, almost like a month. So you have plenty of time.
Ashley:
So when this property, the underwriting goes through and you’re like, yes, we want to make an offer. Are you putting together a full contract? Are you submitting a letter of intent, an LOI? What’s kind of the next step after that?
Kenneth:
Yeah. So once you figure out like, okay, I like the area, I like the price, this makes sense for us, the returns are great. You then draft up a letter of intent, which just, it’s a non-binding agreement pretty much, just stating that this is the price, these are the terms. So usually not, more so now there’s less pushback, but usually on multi-family you’re putting hard money, day one, how much you’re going to be putting, there’s a certain period for due diligence, which is pretty standard in single family as well. And then how long you’ll take to close. So I think standard 60 days here in multi-family. So you kind of draft up the price, the terms and it’s a non-binding agreement, so it’s just showing your intent, but people pretty much respect that heavily in apartments.
Ashley:
So you guys can Google an LOI, a letter of intent, online and find a million different samples of what it looks like. And it’s very common in the commercial real estate world for a letter of intent to be submitted to a seller before you actually have a full contract drafted. So kind of what are some key elements of your letter of intent that you think everybody should use in theirs?
Kenneth:
Yeah. So like you said, you can find a ton of them. So obviously, the date, who it’s going to, the purchase price, the address, well, at least the name of the property, if you want the address but I just usually put the name, the purchase price, how much earnest money or hard money, if you want to put that, how long you’ll have to close, how long you’ll have for due diligence, and whether or not you’ll have financing contingency. Everything else can pretty much be spelled out in the contract. Which, I mean, the contracts are usually really long, so you don’t necessarily have to go into all of that.
Ashley:
So after you’ve submitted the LOI and put that together, what does the due diligent look like? Are you driving comps? Are you going to the actual property? Are you sending people there? What’s that the due diligence process look like for you?
Kenneth:
Yes. So, and I meant to say it, so before submitting an LOI, usually we tour the property. Now there’s some companies that don’t tour, they don’t even want to spend their time looking at it if they’re not even going to win the deal. And it really just depends on what you want to do. I personally think it’s just best to look at it, that way you’re not wasting your time or the other’s, seller’s or broker’s time.
So usually we like to get on site. We like to tour the property. Usually they’ll show you a renovated unit and then a classic unit, and then you’ll get to walk around. You’ll get to look at the amenities. You’ll get, I mean, you could drive the area. So usually we like to drive the area. We like to take a look at the comps that have sold, so sales comps. We like to take a look at rent comps. If we have the ability, we like to potentially schedule tours and secret shop, pretty much, rent comps to see kind of what their units are with our own eyes. Because you can look at it on the internet, but it looks a lot different, usually, in person. So we like to do all of that before submitting the LOI, and then yes, we submit the LOI.
Ashley:
And, of course, when you ask to see a unit as a potential buyer, they’re going to show you the best unit there is.
Kenneth:
Yes, exactly. Yeah.
Ashley:
So, you do the whole checklist and then once you’re like, okay, we like this deal, then you kind of save the actual visiting of the property last and then you’re going and writing your offer?
Kenneth:
Yes. That is usually the very last thing that we do.
Tony:
One follow up question on that, Kenneth. Where do you live in relation to the markets you’re investing in? Because I can imagine for some folks, say you live in California but you’re looking at the Dallas or the Midwest somewhere, it could get expensive trying to find all those properties before actually submitting your LOI. So how do you guys balance that, not wasting too much money up front if the deal doesn’t go anywhere?
Kenneth:
Yeah. And that’s a great question. So we do have properties that are a little away. So we’re in North Carolina and we own properties in Florida. We try to look for deals that are in North Carolina and Georgia, which are either driving distance or just a quick flight away. I would say or recommend that you look in your backyard, unless you’re in a market that you wouldn’t want to be investing in, which is up to your own preferences, right?
But I think the best would be to start just because if you, whenever you look at a map, usually in a place that you live, you can pretty quickly say, oh, I know where that’s at, that’s near this store or near this area and this area’s good, or I don’t know if I want to be in that area. So you kind of already understand that because I’m sure you’ve been driving to work. You’ve either been taking your dog to the veterinarian. You kind of already know the area. So I think that, that would be the best thing to kind of start off with in your backyard.
Tony:
Cool.
Ashley:
The last little piece here that I don’t think we touched on is when you are going to, you’re underwriting the deal, who are you talking to about financing the deals to get that, to find out how much you’re going to have to leverage the deal for, how much money you think you can raise, who’s going to sign for the loan, things like that? Are there key people you discuss that with before you go into underwriting?
Kenneth:
Yes. So as far as financing, so when we do underwrite, we do send it as well to, we use a mortgage broker that all of our group pretty much uses. But you can, I mean, the amount of debt that’s out there, as long as you qualify obviously, is actually insane. So especially with multi-family, they want to lend on these assets as long as it’s a good asset and you can prove that there is value potential. So I would say, you can pretty much Google any mortgage broker, go on LinkedIn and you can find them there. They’re all over the place. Fortunately for us, we have someone that we use and we also have someone that has the capability to, at least for all the deals we’re doing, they have the capability to sign on the loan as a key principle.
But like I said, it really just depends on your network of people. So if you know someone that’s pretty high network or net worth, I mean, and they’ve already told you that they’re willing to sign on loans, you can kind of keep that in mind. They’ll obvious, the mortgage broker will ask for balance sheets and liquidity state proof, things like that and also schedule real estate owned and things like that. But you can kind of have that in line before you go out and submit an offer, I’d say.
Tony:
Well, Kenneth, you’ve done a great job of walking us through kind of what that checklist looks like. But I just want to recap for the listeners to kind of package it up for them. So first you underwrite the deal, right? Then you’re getting your quotes, your insurance, your mortgage, your property management, your taxes. If all those things check out, then you’re actually trying to get boots on the ground, go walk the property, drive the comps. And then if everything checks out, you move on actually submitting your LOI. Does that sound about right?
Kenneth:
Yes. That’s a hundred percent correct.
Tony:
Okay. Awesome, man. So there’s a few pieces there that I want to spend a little bit more time drilling into because I think this is where most newer investors might find some challenges, but first is actually meeting with and networking with brokers. So early in my investing career, we had aspiration of also going into multi-family syndication. We had a really difficult time getting decent deals from brokers, right? Most brokers, they kind of have their Rolodex of syndicators that they get their deals to first, and if those syndicators don’t want it, then they’ll kind of start sharing it with other people, right? Which usually means you’re getting leftovers.
Kenneth:
Yeah.
Tony:
So how can a new investor, I guess, position themselves when talking to a broker to not get the deals that no one else wanted?
Kenneth:
Yeah, absolutely. So first of all, I mean, I think getting to know someone is the best way, honestly, and in order to do that, you need to see them in person, whether that’s you tell them that you’re going to be in the area, or if you live there, telling them, asking them if they want to go grab dinner or not dinner, usually lunch, I do. So go grab lunch or a coffee or something. That way you can get face to face, or if you’re already on their list and you go, usually you can go to their website, sign up for their email blast and they send you deals. So if they send you a deal and it’s on market, you can usually schedule a tour with them and go out and just tour with them, get to know them. And that way they kind of understand, they see you, they see that you’re serious.
And you just get in front of them because then you get to know them. You talk to them, you kind of learn about their story. They kind of learn about you. They see that you’re real, because most people they’ve never met before. So regardless, although you probably won’t be the number one person they think of, you will very easily differentiate yourself to the thousands of people that they have on their list, just because they have already seen you and they’ve gotten to speak to you, and you can get to know someone pretty easily when you speak with them in person because energy’s everything.
Ashley:
Let me ask you this. What’s a piece of advice you have where someone can get in front of somebody, like a really busy person, where if you ask them to coffee, you ask them to dinner, to buy them dinner, if you want to just stop into their office and talk, that, that’s not going to happen because they’re too busy for that. Even if it is somebody who wants your business, if you’re not somebody they know already has a track record or can definitely close a deal, it’s going to be a lot harder to get in front of someone. So do you have an advice of how you can stick out in their mind at all? Is it sending them a gift every single week or nonstop phone calls, sending letter, love letters.
Kenneth:
Yeah.
Ashley:
I don’t know. What would your advice be on that?
Kenneth:
That’s a great question. So two things, if you’re speaking about brokers, in general, in order to, I guess, get brokers to like you, I would say just really getting in front of them. I mean, like I said, whether or not you can, sometimes they give opportunities. If you constantly go on tours, you constantly underway and then you answer them and tell them, hey, this deal does not work because of X, I don’t like the area or the returns are not there or just kind of explain why the deal doesn’t work for you. They’ll start to kind of understand what you’re looking for and they understand you’re serious, but if they send you something and then you just never answer them, they won’t ever really understand kind of why the deal didn’t work. So you’re not really helping them.
Now, if you’re just talking about, I’d say, I guess, valuable people or people that are high-net-worth or just people that don’t have much time, I’d say the number one way is to start a podcast. We, on our podcast, we’ve been able to bring a ton of people. We’ve been able to ask them good questions, but really sometimes questions that we have ourselves. And most people, if you kind of invite them to your podcast, most of the time, they would love to get on a podcast because it’s more exposure for them. And they’re not going to just ask you, how many downloads do you have or anything like that, anything crazy. And over time, you’ll have great conversations with a lot of people. Usually you’ll get their email, at least. Sometimes you can even get their phone number on their signup sheet. And yeah, you can stay in contact or email them once in a while.
Tony:
That’s a great tip, Kenneth, about starting your own podcast. And I’ve shared the story many times, but when I started my first podcast, that was a big part of my motivation as well. It was just like meet as many people as I could. And I was putting out three episodes a week when I first started my podcast and I was doing the math. I was like three people a week at 52 weeks a year, that’s like over a 150 people I’m going to get to meet and talk with, as I’m doing this podcast. And I love that. But one follow up question. How many deals would you say you have to look at? How many deals will a broker send you before you find one that’s actually worth something? Is it one good deal for every five? Is it one good deal for every 100? Where do you kind of fall in that spectrum?
Kenneth:
Yeah. I would say, so I guess, and I think maybe things have changed now. I think the market is turning into a buyer’s market. So we kind of have more say. But as of recently, usually it’s about every 100 deals, 10 of them will make sense for you or fit your, I guess, criteria or something or get… Yeah, your criteria, I mean. And then out of those 10, you’ll probably submit those 10 offers, and out of those 10 you’ll potentially get one or two accepted. And then out of those one or two, you’ll close on one. So two accepted you’ll close on one. So that’s kind of like the metric, I guess. So we aim to underwrite a 100 deals. I wouldn’t say as fast as possible, but we kind of know once we’re getting closer to a 100, it just seems to work out somehow.
Ashley:
And that shows the importance of keeping track too. So you actually know what that metric is within your business.
Kenneth:
Absolutely. Yeah. Organization is key, for sure.
Ashley:
Yeah. Kenneth, this has been all great advice and I want to keep it going by moving on to our Rookie Request Line. As a listener, you can call in at any time to 1-888-5-ROOKIE, and leave us a voicemail. Tony and I will get it, and we may pick it to be played on our show for a guest. So this week’s question is from Nick Bowers from Colorado Springs. I have a question regarding my first investment. I’m investing out of state. Now I’m torn between cash flow or appreciation. I’m worried that I can’t do a cash-out refi on multi-family and grow my portfolio. Which avenue do you guys suggest? Thank you for your time and I love the show. So what would be your advice there, Kenneth?
Kenneth:
Yeah, so especially in times like now, I would say obviously you want to be in a market in which there’s potential for appreciation, but I would say that the number one thing that you should not compromise is cash flow. As long as the property is cash flowing, it doesn’t matter what the value is. You’re still making money. You can still service the debt. You can still service all of the expenses and you can keep it. The worst thing to happen in real estate is not to be able to make your payments or have negative cash flow because that’s kind of what can hurt you if there is a downturn. Evaluations may fluctuate, but if your property’s just producing income and usually rents stay steady through recessions, which is pretty historical, you will be fine. So I would say cash flow for sure. But obviously, you would like to look into a market that has potential for some upside.
Tony:
Yeah. Kenneth, that’s a great point. And honestly, this question about cash flow versus appreciation comes up a lot and, honestly, I think it comes down to the unique person situation. If you’re trying to replace your W-2 income as fast as you possibly can, appreciation isn’t going to help you a whole heck of a lot, right? You need cash flow. But if you’re just trying to invest as a way to help supplement your retirement, then yeah, maybe cash flow isn’t as important today and you’re more concerned about appreciation. So whenever someone asks this question about appreciation versus cash flow, I think it’s a deeply personal question that’s really more aligned with what that person’s goals are when it comes to real estate investing. For me, cash flow is always more important because I knew I needed the money coming in to replace my W-2 income. So I think hopefully that helps point you in the right direction.
Kenneth:
Yeah. Correct.
Tony:
Kenneth, we want to take you onto our rookie exam. So I know you answered this back when you were on with your brothers, but maybe we can tailor your answers today to be a little bit more about the acquisition side of the business you’re focused on. So if you’re ready, we’ll take you to the rookie exam.
Kenneth:
Awesome. Let’s do it.
Tony:
All right. So question number one. What’s one actionable thing people should do after listening to this episode?
Kenneth:
Yes. So I mean, whether you learn how to underwrite, and underwriting can be pretty, it can get complex, but I would say it can be very simple as well. Just learn how to underwrite on the back of the napkin. And or if you have, if you can find an analyzer that you want to use or a model that you want to use, just underwrite deals, whether or not you’re going to go out and look at them or you don’t have to go through all the way, but just understanding why the numbers are the way they are and what makes them that way. I think just looking at deals and learning how to underwrite deals is just the most important thing.
Ashley:
And if you need something to use to analyze a deal, you can go to biggerpockets.com and use the calculators on there to analyze a deal.
Kenneth:
Exactly.
Ashley:
You get five times free and then, but if you’re a pro member it’s unlimited, so.
Kenneth:
There you go.
Ashley:
A really great, easy way to get started because there’s a little link next to every expense, every income input, every input has a little blue link and you click on that and it tells you what it is and where to get that information from. So really great for beginners and experienced investors too. Hey, Kenneth, one question real quick. When you are talking to a mortgage broker, you’re talking to investors, you have some kind of report or you’re showing your calculator, your spreadsheet to these people, that’s super beneficial, right? To have something to kind of put in front of them, instead of just saying, hey, this deal is going to cash flow X amount without showing the proof. Yeah.
Kenneth:
Yeah, exactly. So you obviously build a pro forma, which is just looking into the future, what you think you’ll be spending on each item like payroll, what taxes will be, what marketing is going to be. Just going through those line items and what you think you’ll spend, and then also where you think income will be based on where you think you can push rents. So kind of showing them that spreadsheet and those numbers kind of helps them put together an image or the vision as what you’re seeing.
Ashley:
Yeah, and the Bigger Pockets calculator reports have, once you analyze it, you can just print off a report, little pretty chart, all your numbers on it to show to people. So mortgage brokers or investors on the deal.
Kenneth:
Awesome. Yeah.
Ashley:
Okay. So our next question for you, Kenneth, is as far as your role in marketing acquisitions, what’s one tool, software app, or system in your business that you use?
Kenneth:
I would say CoStar, but that might be a little pricey. Really, I mean, honestly, you can use apartments.com. I sometimes go to apartments.com. I mean, maybe it’s not really like software, but apartments.com, I mean, that’s literally, I’d say, a majority of the time that’s where most apartments market their rent and they put pictures there. They try to make their property look as beautiful as possible and try to market. Because whenever you search up, if you’re moving to a new place and you search up apartments for wherever, apartments.com does their own marketing, so likely their ad or their website is going to be the first link up in the top. So most apartments and us included, we use apartments.com and we market on apartments.com. So I use that to look up rent comp. So I find the subject property and then I’ll look at other properties in the area and kind of see what their finishes are, what their renovations look like, and then what they’re renting their units out for.
Tony:
Awesome brother. So last question for you, where do you plan on being in five years?
Kenneth:
Five years. Oh, wow. That’s a long time from now. So we have, I’d say, some pretty audacious goals. We’ve come across people that have grown their companies pretty quickly. So I’d say one year, five years, I’d say half a billion of assets under management and on the acquisition side, so not as a co-sponsor, pretty much as acquisitions, at least. So yeah, I’d say that, that’s our goal. So whether, and I would say units, but wherever, depending on the market, it could be a 100,000 per unit or a 130,000 per unit. So I think that kind of varies. So yeah, I’d say, closer to a half a billion in management.
Tony:
I love that Kenneth. So our goal in our business is to get to 1 billion in 10 years. So half a billion in five years is almost the same thing, man. So I love that.
Kenneth:
That’s our tenure, so that I just had to do, yeah.
Tony:
You did cut it in half, right?
Kenneth:
Yeah.
Tony:
I love it, man. All right, cool. So let me highlight this week’s rookie rockstar. This is Jason V from Wilmington, North Carolina. I’ve actually never been there, but we’re actually looking at some properties in the North Carolina area. So I might have to pick your brain Kenneth. But Jason says that he’s been investing for two years now and wants hear his most recent success story, but he closed in an eightplex last week. And as part of this deal, he was able to complete a 1031 exchange and got his first commercial property, first commercial loan.
So he believes that the fair market value with the current rent is around $700,000. He plans to do a cash-out refi in six to 12 months and hopefully pull out $200,000. And he’s believing that the value at that time of the property would be about a million bucks, which is amazing, right? To increase the value in such a short period of time. So Jason, congratulations to you, excited to see you get that first commercial deal done. And hopefully we’ll get you on the show soon, once this deal wraps up. So you can tell us all about it.
Kenneth:
Yeah. Jason, congrats. Wilmington is like two and a half, I’m in Durham, North Carolina, so that’s a two and a half hour drive from us. My brother actually studied at UNC Wilmington before dropping out and pursuing real estate full-time. But congrats, that’s awesome. Hit us up, so we can link.
Ashley:
Yeah. Great job, Jason. Excited to see what you do with the deal. Well, Kenneth, thank you so much for joining us again, back on the podcast. Can you tell everyone where they can reach out to you and find out some more information about you?
Kenneth:
Yes, absolutely. So you guys can find us on pretty much at @donisbrothers and that’s Donis, D-O-N as in Nancy, I-S and then brothers on YouTube, Instagram, Twitter, where else? Oh, TikTok. Pretty much every platform.
Tony:
Everywhere.
Kenneth:
Yeah, pretty much everywhere. And then our website is www.donisinvestmentgroup.com, if you guys want to learn more about investing in multi-family and why that might be beneficial for you guys. Yeah, you guys should check us out.
Ashley:
Hey, well, thank you so much. We really enjoyed having you back. So make sure you guys go back and take a listen to the Donis brothers episode. So we had the first episode with all three of them, number 175. Jeffrey was on 193 and Kerwin was on 199. So yeah, thank you so much for joining us. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson. And we will be back with another episode.
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UWM enters the HELOC space
Top wholesale lender United Wholesale Mortgage (UWM) is the latest originator to join the resurgent home-equity lines of credit (HELOC) market.
The Pontiac, Michigan-based lender has started to offer standalone and piggyback options, as fast-rising home values allow homeowners to tap the equity in their houses to pay debts, expenses or investments.
UWM’s products announced Wednesday are available on primary and second home loans, with loans up to $350,000, according to the company’s website. They are not applicable in Texas.
According to UWM, standalone HELOCs are an alternative when a “cash-out refinance doesn’t make sense due to having a low-interest rate on their current mortgage,” the company said in a news release.
Meanwhile, the piggyback HELOC, which provides an additional loan taken out on property alongside a first mortgage, is ideal for borrowers with less available for a down payment. “This is a great option for those who want to split up a first and second mortgage to avoid mortgage insurance or to keep their first in a conforming loan,” according to the company.
UWM has been proactive in launching new products and reducing prices amid higher mortgage rates and shrinking loan volumes.
The lender also announced that it has raised its VA jumbo loan limit from $2 million to $4 million, effective immediately. Last week, it launched temporary rate buydowns, allowing borrowers to receive lower mortgage rates at the beginning of their loan terms by using seller concessions as part of the payment.
The products complement the wholesale lender’s “Game On” initiative, a cut-rate pricing strategy hatched to grow market share with purchase buyers. In response, Homepoint, the country’s third-largest wholesaler, launched a new program to reduce rates by 75 basis points for borrowers with lower income.
In the HELOC space, however, UWM is following announcements from its rivals. Rocket Mortgage, Guaranteed Rate, loanDepot and New Residential Investment Corp. (recently rebranded as Rithm Capital) either have plans or introduced HELOC loan products.
Black Knight recently reported that the amount of tappable home equity nationally hit $11.5 trillion in the second quarter — after accounting for homeowners retaining at least 20% equity. That figure is up by around $500 billion from the first quarter and $2.3 trillion year over year.
The post UWM enters the HELOC space appeared first on HousingWire.
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Austin and 30 Other Markets Are At Risk of Price Declines. Did Your Market Make the List?
As rising interest rates and declining affordability have lowered housing market demand, a correction (a modest decline in housing prices) has been looming for months. On a national scale, housing prices are still up almost 11% year-over-year, but other indicators point to a housing market that is starting to correct.
In this article, I will dive into several methods for measuring housing market health, identify metrics to watch, and label specific markets that are at the highest risk of seeing price declines in the coming months.
Market Data
When looking at the health of the housing market, we could examine many datasets and methodologies. For the purposes of this article, I am going to look at three datasets:
These provide a good balance of long-term trends, short-term changes, and forward-looking data.
Year-Over-Year Data
In normal times, YoY data is the best way to measure growth in housing prices because one, housing data is seasonal, and two, it measures long-term trends. Housing prices follow a similar pattern every year—they peak in the summer and decline over the winter—meaning that comparing January’s data to June’s is not helpful.
The chart above demonstrates this concept well. Clearly, housing prices were consistently trending upwards from 2014 to 2019, even though every year, housing prices fell from May to February. If we were to look at prices from May 2016 to January 2017, it would show falling prices, even though the market was trending upwards.
Again, this is why we look at YoY data, because what happened between July 2022 and July 2021 shows the long-term trends. And as mentioned above, YoY prices on a national level are still +11%. Of the top 250 markets in the United States, zero have seen YoY price declines. Not one!
Having the median home price increase 11% YoY is a massive number in historical contexts but does represent a significant cooling from the absurd growth rates we saw in 2020 and 2021. For context, during the Great Recession, housing prices fell YoY for several years in a row, with prices falling more than 10% YoY in 2009.
So, in today’s market, the growth rate of housing prices in the U.S. is returning to normal, but as the chart above shows, it is still well above historical norms. And although prices are still up YoY, we can learn something from how YoY data is trending. In some of the country’s hottest markets, YoY growth has fallen very fast, with Austin, Texas, leading the way.
Austin grew at about 45% YoY last summer and is now down to about 11%. It’s still growing on a YoY basis, but to me, the rapid rate of deceleration represents risk to the Austin housing market. Austin is seeing its rate of growth fall faster than any other market.
Other markets that are seeing similar patterns are Seattle, Sacramento, Phoenix, San Jose, Boise, and San Diego, to name a few. Checking out the rate of change in YoY growth rates is a helpful thing you can do to better understand your market.
Month-Over-Month Data
As I said above, during a stable housing market, I personally believe YoY data to be the most important and don’t spend too much time on MoM data. But, during markets in transition, like the one we’re in currently, looking at MoM data can be helpful.
When examining the top 250 markets, the vast majority are still seeing increases, but 31 of them did see declines. San Jose, California, saw the steepest drop at -2.7%, but the average among the 31 markets in decline was modest at just -0.64% MoM. Here’s a list of the 31 markets within the top 250 that saw declines:
On the other hand, some markets have kept growing! For example, Miami grew 2.35% MoM. As I’ve said for months, I believe the most likely scenario over the coming months is that some markets will keep growing, and some will decline. So far, that seems to be the case.
When looking at MoM data, remember this is just a single month and thus, doesn’t make it a trend. Prices do tend to peak in early summer and start to come down, and it’s far too early to know if this means we’ll see YoY declines in any of these markets (or more) in the coming months. This is one short-term data point that needs to be considered alongside other data.
Need an investor-friendly real estate agent for your next deal? Match with an agent today!
Inventory
The two datasets we’ve looked at so far, Year-over-Year, and Month-over-Month, are both backward-looking. Helpful, of course, but many of us want to know what might happen next. To that, we need to turn to a dataset that tends to predict the future performance of housing prices: inventory.
Inventory measures how many houses are for sale at a given time and is a good measure of the relationship between supply and demand. When inventory is low, it’s a seller’s market, and prices tend to rise. When inventory is high, it’s a buyer’s market, and prices tend to be flat or decline.
As you can see in the chart below, inventory is extremely low in a historical context. Normally, we’d expect well over 1.5M listings, but we’re still below 1M.
This is important because, as I’ve written about extensively before, if housing prices are going to come down, inventory needs to at least approach historical levels. Clearly, from this chart, that is not happening on a national level yet. But the trend seems to be heading in that direction.
Check out this chart that shows inventory growth YoY. For most of the pandemic, inventory was falling consistently, but now we’re seeing it rise rapidly on a year-over-year basis.
Again, we’re still far from normal, but inventory is trending upward. This is a key metric to watch to understand the direction of the housing market in the coming months, on both a national and regional level.
Notably, some markets are seeing inventory levels recover to pre-pandemic levels. This indicates that those markets are at a high risk of seeing YoY price declines (which again, we haven’t yet seen in any markets) in the coming months or years.
Recently, San Francisco became the first market to officially return to pre-pandemic levels. San Jose is right behind and just 1% below pre-pandemic levels, with Las Vegas, Phoenix, and Austin, heading that way as well. Below you can see an example of Phoenix, Arizona.
To me, if you want to know what will happen in your housing market in the coming months, check out inventory and days on market. If they start approaching pre-pandemic levels, the risk of price declines on a YoY basis rises significantly.
What This All Means
Of course, we don’t know which markets will decline, but hopefully the above data helps you understand what is happening. To provide more context, we can look at forecasts created by Moody’s Analytics, which predict price growth between now and the end of 2023.
According to Moody’s, three cities in Florida are poised for the greatest declines: The Villages, Punta Gorda, and Cape Coral. Of those, Moody’s predicts The Villages to decline by 13%. That’s a big number! But remember, that’s for the riskiest city. Remember, in the Great Recession, prices fell 20% nationally!
Moody’s also predicts relatively large drops in Reno (-8%), Austin (-7%), San Diego (-6.5%), and Boise (-6.2%).
On the other hand, Moody’s forecast suggests that some cities will grow. On top of that list is Albany, Georgia (+10%), Casper, Wyoming (+8%), New Bern, North Carolina (+7.6%), Augusta, Georgia (+7.2%), and Hartford, Connecticut (+7%).
When I look at all this data in aggregate, I believe the main takeaways to be:
The markets that continue to show up and, to me, carry the greatest risks, are:
On the other hand, cities that continue to show strength are:
So, as you navigate the transitioning market, keep these things in mind. You’re probably going to see a lot of sensationalist headlines in the coming months, but you should keep track of this data for yourself. You can do so on various websites like Redfin and Realtor.com, and of course, I’ll keep publishing my research and articles like this on the BiggerPockets blog regularly.
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A big thank you to Pooja Jindal for her help researching this article!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Fannie Mae sees dark days ahead for the housing market
It will get worse for the housing market – and mortgage industry – before it gets better. That’s the takeaway from a group of economists at Fannie Mae who slashed their forecast for 2022 home sales this week.
“Housing remains clearly on the downtrend — and has been for several months now — due to the combined effects of outsized home price increases and the significant and rapid run-up in mortgage rates,” Fannie Mae’s Chief Economist Doug Duncan said in a statement.
Fannie Mae’s Economic and Strategic Research Group expects total home sales to decrease 16.2% in 2022, a further downward revision from July’s projected drop of 15.6%.
The latest forecast also projects total mortgage origination activity at $2.47 trillion in 2022, down from $4.47 trillion in 2021. The mortgage market is projected to slip even further in 2023, dropping to $2.29 trillion.
A brutal housing market has already tested the business models of mortgage lenders, and it will be a while before conditions improve. In the second quarter of 2022, nonbank mortgage lenders on average lost $82 per loan, according to the Mortgage Bankers Association. Combining both production and servicing operations, only 57% of companies in the MBA report were profitable in the second quarter.
On average, IMBs generated $705 million in origination volume in the second quarter, down from $808 million in the previous quarter. Total production revenue for IMBs, which includes fee income, net secondary marking income and warehouse spread, decreased to 335 bps in the second quarter, down from 350 bps a quarter prior. On a per-loan basis, production revenues declined to $10,855 per loan in the second quarter, down slightly from $10,861 per loan in the first quarter.
Many lenders have been cutting hundreds or thousands of staffers amid the dip in origination volume.
Fannie Mae forecasters said that despite mortgage rates settling in the low 5% range over the past month, recent incoming data has led them to revising the home sales forecast, notably because of a drop in new home sales.
New homes sold at an annualized pace of 590,000 units in June, the lowest sales pace since April 2020. ESR Group researchers now expect new home sales to finish the year at 632,000 units, down from 668,000 in last month’s forecast. New home sales are now projected to fall 18% from last year, while existing home sales are expected to fall by 16% in 2022 to 5.143 million.
Fannie Mae’s ESR group also said it expected real gross domestic product growth for the full year 2022 and 2023 to remain flat from last month at 0.0% and negative 0.4%, respectively.
“The continued expectation that real GDP growth will be negative beginning in 2023 is due to the combined effects of tighter monetary policy weighing on business and residential investment and still-elevated inflation weighing on consumer spending,” Fannie Mae wrote in the report.
The ESR group wrote that it expects inflation to tick down gradually, ending 2022 at 7.2% and 1.8% by the end of 2023.
The post Fannie Mae sees dark days ahead for the housing market appeared first on HousingWire.
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Suzy Lindblom named COO at Arc Home
Mortgage operations veteran Suzy Lindblom was named chief operating officer at lender and servicer Arc Home this week.
Lindblom joins the non-QM-focused lender following a stint at First Guaranty Mortgage Corp., where she was COO before the company declared Chapter 7 bankruptcy and folded. She was previously the COO at Glenn Stearns’ Kind Lending and Planet Home Lending. Lindblom also spent five years at Stearns Wholesale between 2012 and 2017, where she was managing director of national fulfillment and operations.
Arc is owned by AG Mortgage Investment Trust, a publicly traded real estate investment trust. The fund is managed by Angelo Gordon, a New York-based hedge fund with some $50 billion in assets under management.
Arc offers a range of mortgage products, but specializes in non-QM loans. The New Jersey-based lender in April announced that it had released non-agency products through its delegated correspondents, including bank statement loans, DSCR, agency plus and a program geared toward borrowers who fall just outside the parameters of a traditional jumbo loan.
Lindblom was named a HousingWire HW Woman of Influence in 2019 and a HousingWire Vanguard award winner in 2020.
The post Suzy Lindblom named COO at Arc Home appeared first on HousingWire.
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The Rookie’s Guide to Finding Private Money for Your Next Property
The term “other people’s money” is common in the rental property industry. You may hear successful investors use it all the time—but what does it mean? Who are these “other people,” and why are they giving out money so freely? Don’t worry—rich relatives are not necessary for this episode of the Real Estate Rookie Podcast. We’re not talking about taking money from your Grandma. We’re talking about private money lending.
Who better to bring on to the show than Alex Breshears and Beth Johnson, authors of the new BiggerPockets book, Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending? Although tailored towards would-be passive private money lenders, Lend to Live drops some serious knowledge that the everyday investor can use. If you’ve ever wanted to know where to find private money, how it works, and how you can use it to grow your real estate portfolio, this episode is a great place to start.
Alex and Beth break down the fundamentals behind private money lending, what makes a great private money lender, and how to vet yours when accepting money. Private money can create phenomenal opportunities for active investors, but it comes with legal landmines that are easily activated if you don’t know what to look for. So, before you start accepting money from a local lender, be sure you read Lend to Live first!
Ashley:
This is Real Estate Rookie, Episode 210.
Alex:
I think one thing that doesn’t get talked about enough early on in real estate is not so much about how do I do this thing. Everybody wants that very technical, how do I BRRRR something, how do I refinance something, but nobody talks to the kind of beginners, the rookies about is this method of investing going to suit your personality, your skill set, and your goals, and that is never a conversation I had on 20 years ago when I started investing. It was like, hey, everybody, I knew bought a house, used their VA loan, and then they moved, and they rented it out, and then you just rinse and repeat.
Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson
Tony:
And welcome to The Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, motivation, and education you need to kickstart your investing journey. What I like to do to start these episodes off is read some reviews from the wonderful people in our rookie community. This week’s review comes from username, Bravesmith28 and Bravesmith says, “Impacted my life greatly. This podcast has been constantly pushing me in my real estate investing career. Listening to this podcast has got me thinking about different strategies to funneling leads to figure out what the property can be used for financing. I’ve purchased three single family properties since listened to this podcast, and I’m about to do my first short-term rental. I would not have even thought about this without the BiggerPockets podcast, and I’m looking forward to growing my business.”
So, Bravesmith, we appreciate you, congratulations on your success, and if you’re listening to this podcast and you have not yet left us a review, ask yourself what you’re doing with your life. All right? The more rating and reviews we get, the more folks we can reach, the more folks we can help, and that is our ultimate goal here at The Rookie Podcast. So, Ashley Kehr, boring banter time, tell me what’s going on. How are you?
Ashley:
Well, there’s one thing I just need to know before you can even get into anything with the podcast. When you do your intro, after I say our names and you say what this podcast is about, do you have that memorized, or do you have it written in front of you? I just need to know because you-
Tony:
I just kind of spitball it every time.
Ashley:
I know you do.
Tony:
It just kind of rolls off.
Ashley:
You do such a great job. Yeah.
Tony:
Thank you. Thank you. I’m glad it comes across as consistent. That’s what I was shooting for.
Ashley:
Yeah, and I’m so glad that you have that role, and I only have to remember our names and the episode number.
Tony:
I always think the same thing when you’re finishing the episodes and you’re like, “All right, I’m Ashley Kehr, blah, blah, blah,” and then you close it out. I feel like I would’ve screwed that up every single time.
Ashley:
Yeah, but it’s only just our names and our Instagram accounts, and then the ending, I just, see you later or see you next time or thanks for listening. It’s different every time. There is a sheer moment of panic every time where I’m like, “What do I say to end?”
Tony:
What do I say? Yeah, but you do a great job. You do a great job.
Ashley:
Thank you, thank you.
Tony:
And on that point, right, we read one of the reviews. It was a mean review saying that they hate our boring banter and this, that, and the other, and it’s been so crazy, Ashley. We’ve been hosting these monthly meetups, and since that episode aired, I don’t even remember which episode number it was that we talked about those mean reviews, I’ve had so many people at these meetups come to me and say, “I was so upset when I heard you guys say that. I don’t agree with that person at all. I love what you guys talk about. I love hearing about your guys’ stories.” So, just know that for the folks that appreciate me and Ashley sharing our personal stories at the beginning of the episodes, we appreciate you guys.
Ashley:
Maybe I need to get the courage to read that one review that was directed at me. Maybe one time it’ll be like, was it Jimmy Fallon that does the mean tweets where I read it out loud?
Tony:
We do a whole Saturday episode about this.
Ashley:
It’s a review where I laugh and cry at the same time. So, one day, I will work up the courage to read it out loud on the podcast. Maybe, Tony, one time we’re doing a live podcast, we’ll do a couple shots or something, then I’ll be good.
Tony:
There you go. In Denver, in Denver next.
Ashley:
Yeah, yeah, yeah. So, what’s new with you, Tony? What deals are you working on right now?
Tony:
Yeah, I mean, same old, same old. We’ve got four rehabs we’re working on right now, another three or four short-term rentals that we’re getting set up that we’ve already purchased. So, just busy, busy, busy. I think, depending on where this hotel deal goes, we might slow down a little bit on the acquisition side just to kind stabilize this hotel and stop my hair from falling out. So, we’ll see what happens.
Ashley:
Is there any left to fall out?
Tony:
No, there’s none. We bought them all. We’ve got them all.
Ashley:
Yeah, today I went and looked at a commercial property. So, it’s two units, and the majority of it, 80% of it, the larger unit is vacant, and then there is a smaller unit that is occupied right now, but there’s also a kiosk for a local bank that has an ATM there, and I cannot believe how much they pay in rent just to put this little ATM kiosk in the parking lot. It takes up no space. They don’t have any reserved of the parking spots. It’s not part of any of the building square footage, just off to the side, and they pay a ridiculous amount of rent, and when I was meeting with the property manager today, he said that at all of the buildings, he manages almost every single one, they reach out to a bank and ask them if they want to put a ATM kiosk in the parking lot of their plaza. So, I thought that was really cool.
Tony:
So, what’s your plan with the property?
Ashley:
So, it’s actually another investor that wants to buy it because he owns the adjacent property, and so, we went into it kind of looking at it for him, but he doesn’t need the whole square footage of the building. So, we kind of looked at the tenant that’s there now. Their lease is up in January, this coming January, and as of right now, it’s just, of course, they say we’re in negotiations, but that’s coming up really close. So, if that tenant was to move out, I’d be worried about what to put in that unit, but I think there’s huge potential in the front of the building. So, the other investor can take the back of the building and use it for what he needs, and then the front of the building, I think would be great indoor climate-controlled self-storage because there is none in the area.
So, just walk in this property, Daryl and I could visualize it. We’re like mapping out the unit sizes that could go in there and the walkways would be here, and we’re like, “Okay, we got to get AJ on the phone. What are we going to do here?” You guys don’t know AJ Osborne, self-storage king. But yeah, so that was exciting. But first we need to find out if the other investor can occupy the other unit, and if it makes sense for his current business to step in and take over this one. So, we had a little meeting with him and it was like you need to go to your manager and you need to break down, okay, what’s your new overhead going to be? How much can you increase your business by? And is there going to be a profit? Is this going to be worthwhile?
So, once we get those numbers in, then we can analyze the deal a bit better and see how it turns out, but exciting. It’s always exciting when… That’s the most exciting part to me, and I feel like I haven’t really gone and looked at a property in a while that I’ve been super excited about-
Tony:
You’re excited about.
Ashley:
… and I could just visualize this is how we can make income off of it because of different things they do. And so, yeah, just pumped up today from that.
Tony:
Yeah, I can see it. I can see the excitement.
Ashley:
And you know what? It actually made me realize this is what I need to get back to because Daryl handles a lot of that now is the acquisition side. It’s like I need to get a lot of other stuff off my plate so I can get back to the thing that I really love, and that’s acquiring the deals and underwriting them and figuring out how to make money off them.
Tony:
And not to go too far off a tangent, Ashley, but I love that. You’re saying that because when we interviewed Pat and Tim Rhode, their podcast will come out after this one, it’ll be episode 216, but they’re the founders of GoBundance, and in that episode, they talked about how they coach entrepreneurs to move from 100% obligation to 100% interest, and I feel like you and I have always struggled with that. Not struggled with it, but we haven’t been able to make that shift fully yet in our own businesses, right, and I’m in the same boat where it’s like I’m so excited to start building this team where they can handle all the things that I’m obligated to do, and I can really start focusing on the things that I’m mostly interested in. So, I’m glad that you’re starting to take those steps. I can see the excitement just vibing off your body.
Ashley:
I know, I’m super up today about it, and I don’t even know if this deal is going to happen. There’s so many moving pieces, but just day one going in and visualizing, and then I was so pumped up on the way home that I drove by this property that I drive by pretty much every single day, and I see it out of the corner of my eye and everything, but after looking at this other property, I was just like, “Wait, I could do this at this property. I could do this at that property.” I called the listing agent. I got some more information. I’m going to see that one tomorrow morning now too.
Tony:
There you go. You’re on a roll.
Ashley:
So, it’s just like when you’re motivated and you’re inspired and you’re pumped up, I feel like it gets the juices flowing like, okay, more ideas, more ideas then kind of flow through, and that’s why I love this podcast because listening to it and having these guests on, every single time I get motivated and excited.
Tony:
Yeah. Well, let’s talk about the guests today.
Ashley:
Yeah.
Tony:
Yeah, we have Alex and Beth on the podcast. So, Alex and Beth, they actually just recently wrote a book for BiggerPockets, and I’m going to give you the full title. It is called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. So, essentially, the premise of this book is both Beth and Alex operate as private money lenders, and they’re kind of talking about what it’s like to be a real estate investor from that angle, but they also give people, I guess, advice on how to find private money lenders to work with. So, they’re kind of hit it from both sides, and I think they do a really good breakdown for new investors who have no experience, who have no deals about how those folks can go out and find and work with potential private money lenders, even if you have no one in your network.
Ashley:
Yeah, and that’s also something super exciting is using other people’s money to purchase a deal, and as you start learning about these different creative ways to finance a deal, it’s looking at a properties, okay, what are the different ways I can make money, but also looking at the property and saying, “Okay, what are the different ways I can finance this?”
So, this episode right here is just a great little crash course on using other people’s money to finance a deal, but also if you actually realize that you don’t want to own the property, you don’t want to be a landlord, and Alex says a statement about her in the beginning as to why she became a private money lender, and I think it’s really important to listen to because there’s all these different types of real estate investing, but they’re all different kinds of roles and passivity and being active in them, and they have different kind of responsibilities that you have when you pick a certain kind of real estate strategy or different type of way to invest in real estate. So, if you’re kind on the fence about what you want to do in real estate, this is a great episode to listen to too.
Tony:
Yeah, real quick, Ash, I’m glad you mentioned what Alex said at the top of the show about defining why she became a private money lender because I think that’s going to break down a lot of limiting beliefs that real estate rookies have when it comes to finding private money lenders and that they don’t have the skill set to find those folks. So, really, really pay attention when Alex goes into that piece.
Ashley:
Okay. Well, let’s get into the show. Alex and Beth, welcome to the show. Thank you so much for joining us. Alex, let’s start with you. Could you tell us a little bit about yourself and your history with real estate?
Alex:
Sure. I am a military spouse of 22 years now. I’m currently sitting my 19th address in 22 years, and the reason that’s important is that actually led to the reason I do private lending over other ways of investing in real estate.
Ashley:
That’s awesome. Well, we can’t wait to hear more about that, but you are here today because of something exciting that has come out. So, do you want to share that news and then we can move on to Beth?
Alex:
Sure. So, we now have a book out on the BiggerPockets platform, and it’s about private lending, and then really it’s from the perspective of how to be a private lender, but active investors can also find value in it in that it’s going to kind of teach you what private lenders are looking for, and you can also kind of work your network to say, “Hey, this is how I’m going to safeguard my capital. Here, I’ve read everything in this book. This is the action steps I’m going to take.” So, it’s really kind of written for both sides of the house.
Ashley:
Awesome. Well, we can’t wait to learn more and kind of get a crash course in both of those things. And Beth, what about you?
Beth:
Yeah, so I started in real estate investing in the early 2000s. I’d always considered it to be something that would be a side hustle. I grew up at my dad’s flip projects and his rehab projects and begrudgingly had to be there, but it gave me a lot of foundation to want to invest in real estate when I got older. I just happened to get into private money lending because of a blind date that I was set on. He’s now my husband, and we are running a private money matchmaking business, I would call it, in the Washington market, and over the years, we just kind of realized that a lot of people wanted to passively invest in real estate through private lending, and it became kind of a long arduous journey to grow it into an active business. So, Alex and I decided with our corporate education and academia background, we just kind of wanted to go public with private lending.
Tony:
So, Beth, I mean, you threw me for a second there when you said you started lending because of a blind date. I thought you became a private money lender to the person you went on the blind date with, but not quite how it worked out. I like your story a little bit better. So, I’m really curious. So, both of you, and I know we’ll get into this a little bit later, but both of you decided to lend or to become real estate investors because of the private money approach. So, Alex, we’ll start with you. Why was that the route that you chose to go down over the traditional buying a property and getting the tenants and doing that whole thing?
Alex:
So, just to be fair, I did those other options. I was a long-term landlord. I did fix and flip. I was absolutely miserable doing both of those things. I think one thing that doesn’t get talked about enough early on in real estate is not so much about how do I do this thing. Everybody wants that very technical, how do I BRRRR something, how do I refinance something, but nobody talks to the kind of beginners, the rookies about is this method of investing going to suit your personality, your skill set, and your goals, and that is never a conversation I had on 20 years ago when I started investing. It was like, hey, everybody, I knew bought a house, used their VA loan, and then they moved, and they rented it out, and then you just rinse and repeat, and while that can be a viable way to do something, it did not suit our skill set.
Just as an example, my husband and I do not have children. I don’t like children because I don’t want to babysit other human beings. Anybody who’s ever had to deal with contractors and tenants know all you’re doing is babysitting adult human beings, and it drove me crazy, whereas when I was lending money, whether it’s JV or kind of just as a lienholder on a property, I still had some relationship with them. It was still kind of collaborative which is what I enjoyed, but I didn’t have to babysit them. I didn’t have to go and say, “Hey, you installed the wrong beige tile in this room. It needed to be this other tile,” and stuff like that just drove me insane.
So, I finally just kind of happened upon this and I just discovered kind of, hey, this actually suits my personality. It suits my skill set and then also suits my lifestyle because, like I mentioned earlier, I move so much so the idea of trying to have six rentals in six different places we’ve lived being a long-term landlord from 2,000 miles away is just miserable to me. But not saying it’s a bad way to invest. It just, it didn’t suit my lifestyle as a military spouse.
Tony:
Beth, what about you?
Beth:
Well, my journey into private landing was kind of born out a necessity. So, as I mentioned, I was set up on a blind date. At the time, I was just a single mother of two. I was working part-time as a tech consultant, just trying to get my life back together. I had done flips, live-in flips, but my ex-husband was the other half of the sweat equity, and I just didn’t really see how I could possibly do it again and go it alone. And so, when Matt, my now husband, brought up the idea of getting in a private lending, he wanted to do it again, he’d done it in the past and had a couple of interested friends that also wanted to invest their capital, I was intrigued.
I mean, I learned about real estate investing through my parents, but I never knew how they sourced the capital for their project. So, after that date, and I tell this story all the time, I went home and googled private lending. I didn’t even know what it was, and I thought what an interesting way for me to be able to invest passively in real estate and still afford me the opportunity to grow my generational wealth and be a mom first. And so, that was the reason I got started into it.
Tony:
So, just to kind of clarify, what you guys are saying is that there are people who exist that are willing to take the money that they’ve earned and give it to someone else so that that person can then go invest in real estate, and all that person has to do is pay the first person back. That’s a thing that happens in the world today.
Alex:
All the time.
Beth:
Absolutely. I mean, BiggerPockets, everywhere you talk about it, it talks about other people’s money, right? Well, where are the other people in OPM? And they do exist out there.
Ashley:
Okay. So, let’s start to tailor this for rookie investors. You’re a rookie investor and maybe your ears picked up like, “Okay, I don’t have money. Maybe this is the way I can find money.” As a rookie, a new investor, how do you find the people like you, those other people? What are some steps they can take?
Alex:
I would say the first slices is realistically is going to your local meetup or local REIA event and just participating. That could be in virtual events. They get together at a micro brewery, coffee shop, whatever it is because a lot of times the private lenders like we are talking about today are not going to come forward with a formalized rate and term sheet. We’re a little more on the lurker side of life, not creepy, but we’re paying attention to who’s in our market and what they’re doing and how they’re doing it.
So, I would say showing up consistently and just talking about your business plan, if you know your numbers, “Hey, I’m looking for three-bedroom, two-bathroom homes in this city for this price range, and I plan on doing moderate rehabs,” and that gives everybody in your network a good idea of what you’re looking to buy. So, if you have also happen to have wholesalers in the room, they know, “Oh, wait a minute. I just heard this person say they want three twos in this city with this purchase price,” and anybody that has capital in the room also would be like, “Oh, okay. Well, I’m interested in lending in that city too.” So, it ends up being a point where you have to build your network.
Tony:
Beth, what about for you? What advice do you have for new folks that are looking to find those private money lenders?
Beth:
Yeah, I completely agree with Alex. I think it’s going to become more of a local network type of thing and not looking at the national level for private lenders. There’s a saying that people don’t care about what you know until they know that you care. So, lead in with personal relationships first. Always talk about the kind of work that you’re doing, and the more that you share about that, the more that people will become interested and want to know more and perhaps maybe invest in you and the projects.
Ashley:
A common question that Tony and I received often and I’m sure a lot of other investors get too is if they do have somebody that is willing to lend to them privately, the question that we get asked is how do I structure it, what is the correct way to structure it? And there’s no correct way, but what advice can you give to someone to here’s a starting point as to the first offer to have them put together some kind of deal? Do you have any advice or tips for that as how they should even approach the person with an offer, or do you just leave it up to the private lender to tell you what their terms are?
Alex:
I would say it kind of goes both ways. Private lending in the way we are talking about private lending is very much a relationship model. So, not necessarily this is it. There are some guidelines. Legally, we have to stay within these certain guidelines, but for the most part, it’s not this is hard and fast, this is everything we do, it’s two points for origination, 10% annualized rate. It’s really going to matter on the property, the person, just the deal as a whole.
But I would say having that discussion early on of what they lend on because for example, some private lenders might not lend on multifamily. They will be only single-family home investors. So, getting a real clear idea what they’re willing to lend on will be a great starting point and then specifically how you can protect them. So, if you are an active investor and you’re asking someone to send you $100,000 and everything’s going to run through closing. So just to be clear, no one’s exchanging money outside of closing, but you’re going to send $100,000 to this closing company and just kind of hope and pray this person performs like they’re saying.
So you can have a conversation with them and say, “Hey, this is how I’m going to protect you in the deal. You’ll be in the first lien position or first mortgage, first deed of trust, whatever it happens to be in your state. I’m going to have adequate hazard insurance. I’m going to get lenders title insurance. We’ll have a legal professional that’s knowledgeable in lending draw up the documentation.” So, when you start talking to them about all these ways that as an active investor I’m going to protect your money as a lender to me, that usually really kind of helps calm the fears of that potential new lender because they’re like, “Oh, okay. Well, I hadn’t even thought about that. I’m glad you thought about that.”
Ashley:
So, Alex, you mentioned something in there. You said that an example of a structure could be two points and then 10% interest annualized. Can you explain that for somebody who doesn’t even begin to comprehend what those terms even mean?
Alex:
Sure. So, anytime in the lending space somebody talks about points, it’s usually in the context of percentage points. So, two points for an origination fee would be 2% of the loan amount. So, if it’s a $100,000 property, it would be $2,000 in origination if it’s a two points origination fee. Annualized interest is the amount of interest you would pay over the course of 12 months. So, just to keep numbers simple, if it’s a 12% annualized interest rate, that means you’re roughly paying about 1% of the loan amount every single month in interest-only payments which are different than amortized mortgage payments which a lot of the people who might be, you bought your primary residence, and you’ve kind of had that shock of looking at your mortgage statement and be like, “I only had like $26 go towards my principal balance this month because I just closed on my house,” so it’s a little bit different from that structure. These are generally interest-only payments and they’re for a short time period, whereas your primary residence is 30 years and it’s an amortized payment.
Ashley:
Thank you so much for explaining that. Would you say that’s almost like two things that somebody could look at as a starting point? So, some of the advice I always give rookie investors when they’re trying to figure it out is just put something on paper that works for you and present it to the person you’re trying to get to finance your deal and then negotiate from there. Besides the interest rate and points, is there anything else that they should think of ahead of time when they’re kind of putting together a structure or an offer?
Beth:
I was going to say there’s so many more terms to consider other than just the rate and the points to pay for the loan. I think that’s the obvious choice to lead in on the conversation with working with lenders, but really performance matters greatly, understanding the length of the terms, how they’ll operate, and what kind of needs they’ll have from you as the borrower. The last thing you want, especially as a rookie is to have a lender that might want to meddle. I mean, I’ve had some lenders that have shown up to job sites before and you’re like, “Oh, what are you doing there?” They have to be included and communicated to effectively to understand where you’re at on a project, but you also, to Alex’s point, don’t need a babysitter.
So, understanding how the lender will operate, what kind of terms it can offer, if you have a hiccup in your deal and maybe you need a few more bucks to get across the finish line, are they willing to do so, are they flexible. So, those are some of the more qualitative aspects to vetting out a lender that I think are probably more important than rates and terms. Of course, you need to back into a specific profit margin, so your numbers need to pencil out correctly, but that really to me is one of the last factors to take into consideration when looking at a lender.
Tony:
I love that point, Beth, about making sure that there’s also a good working relationship there. Like you mentioned the phrase you don’t want a babysitter as your private money lender, and to someone that maybe has never worked the private money before, they might be willing to take money from anybody, anybody that’s got a pulse and is willing to give them that those funds. But I think, yes, when you get to a certain point, you definitely want to vet that private money lender to make sure that there is a good match there.
I want to go back just really quickly to the finding the private money lender piece because I always think about where I was when I started my investing career, and I had no network of people that had the liquid funds or the network worth to be a private money lender to me. I didn’t have friends, I didn’t have family, I didn’t have really anyone in my close circle that could do that for me, and I’m sure there’s a lot of rookie investors that are probably in that same boat. So, Alex, you mentioned going to the local meetup and kind of building relationships through there, but Beth, I’m curious to hear your take because you said that you work now as a matchmaker between new investors and private money lenders. Can you give us some more details on what that looks like?
Beth:
Sure. I think that one of the best ways to be able to legitimize yourself as a borrower is not only attend these types of REIA meetups, local real estate investing meetups so that you can share your story and make personal connections with people, but also sharing your successes or a little bit more about who you are on social media. I will tell you that most private lenders that I work with will do their digging. We put our inner psycho on and start stalking you on the internet to see what we can find out about you first, and so, it’s really important to showcase what you’re doing out there in terms of what are you learning about. Even if you don’t have any experience, where are you going to grow your experience and your education about real estate investing? That will naturally attract people to come and investigate what you’re doing and maybe it’ll peak their interest to want to invest in your projects and in to you particularly.
Tony:
Yeah. So, I want to get into the flip side of this actually being the private money lender, but one last follow up before we do. Alex, I’ll start with you on this one. So, say that I’m out there, I’m sharing my journey, and again, say I have no deals. Right? I’m a complete rookie, and I’m sure in my journey where I’m underwriting these deals, and I’m posting on my Instagram story, and I’m going to the meetups, and I’m talking to people. What happens when I actually find the deal that I need private money lending for? How do I actually open up that conversation with folks to see if they might be interested? As I’m meeting people, should I be asking them like, “Hey, would you ever be interested in lending in a private money situation?” Or should I wait until I have the deal and say, “Hey, I know we’ve never talked about this, but would you be interested?” Just kind of walk us through what you feel is the best approach for a rookie that’s done zero deals to start that conversation.
Alex:
I would say probably the first case, let people know of early, ahead of time, this is the type of property I’m shopping for, this is the business model I want to pursue. For example, if you are a BRRRR investor, maybe having a conversation with your local community bank or a mortgage broker so you can have a preapproval so when you start that conversation, you can say, “Hey, look, I want to BRRRR my first property, but I need funds to actually close on it, but I have a preapproval from a bank. I know I’m going to be able to refinance out.” That shows anybody, especially a private lender, that you’ve kind of thought about the numbers, you have the credit worthiness to refinance out because us as lenders are only paid out when you either sell the property or refinance the property. So, it’s very important to us that the exit strategy you’re putting forward actually is feasible, that you’re going to be able to do it.
And so, I’d say letting people know what you’re doing, how you’re doing it. Talking about your underwriting would really help too because if I could go in and scroll through Facebook, for example, and see you’ve analyzed five deals in the last two weeks, and you’re putting out numbers that seem realistic, even if you didn’t get the deal, put a contract out and didn’t get it, but you’re still putting numbers forward that are realistic, okay, your ARV isn’t super inflated. Your rehab cost budget looks pretty healthy and pretty accurate. To me, that’s going to let me know that, okay, they might be junior, they might be green, but they’re taking the steps, they’re educating themselves, and they’re learning about the process, and they’ve thought about how to get my money back to me.
Tony:
Beth, would you agree with that same approach?
Beth:
I’d a hundred percent agree. To the point that a borrower can really address lenders from the point of view of a lender, practicing underwriting deals, creating project proformas, sharing out your knowledge and not even just practicing it, but sharing with lenders and not be afraid to hear your deal kind of sucks. I’ve said it to a lot of investors before too. They actually appreciate that candor, and it gives them the practice of being able to present a deal, present themselves with a prospective lender, and I think that that’s just good experience to have, and when you pair yourself with a lender with experience or even another investor, right, maybe it’s doing some practice role-playing with another active investor, trying to pitch a deal to them as if they were going to invest as a creditor on the project, it’s just really good experience to have.
The more that you can practice and articulate your numbers, the better you’re going to come across to a lender, even without experience because we lend to borrowers all the time who are just getting started. Our mantra is everyone is just starting the same journey, they just may be on an earlier chapter than we are, but they still deserve a chance. So, without experience, you still have a chance to make a move so long as you’re practicing each of those steps along the way in terms of finding the right deal, underwriting it, presenting it to a lender, showcasing what you can bring to the table, and how you can safeguard their capital investment in you and the project will certainly go a long ways towards establishing some credibility.
Ashley:
That’s great advice. I love that step of don’t be afraid to take criticism as an investor pitching your deal. That’s almost like a checks and balance right there by having the private lender give you that criticism, give you that feedback. So, that’s awesome. I want to now take it and transition it to the other side. So, maybe someone listening is like Alex, and Alex, you hit it on the head right there by saying it’s babysitting adults when you have tenants. That was what made me want to quit property management was getting videos from a tenant videoing her ceiling because the tenant upstairs was banging their toilet seat too loud when they shut it, things like that. So, what if you want to be a private money lender? How do you put yourself out there without getting tons of people coming at you like, “Oh, give me money”? How do you weed through the deals? What’s your best advice for somebody who wants to start out as a private money lender?
Alex:
So, for private money lending the way we are doing, it tends to be very hyper local. So, if you happen to live in an area where you are willing to lend, I would recommend first stop is talking to an attorney that is familiar with lending specifically in your state. That may not be the person you closed your loan with when you bought your primary residence because a lot of those attorneys, not that they’re not capable, but they get emailed the mortgage documents from the lender. They didn’t self-generate them. So, I would say making sure you have that, you know what the legal guardrails are. Do you need to be an LLC? Do you need your borrower to be an LLC? How many loans can you do in a year and not be licensed? Do you even need a mortgage broker’s license?
And then second off, we are always lending on non-owner occupied property. It has to be investment property. So, again, because that owner-occupied property falls underneath federal regulations, whereas non-owner occupied property falls under state regulations. So, I would say knowing your location first where you’re willing to lend and then figuring out the laws that are associated with that location, and then start drilling down to what are you willing to lend on? Are you okay doing just single-family homes that need a quick fix and flip? Are you willing to take on something that has considerable damage from a flood or fire, maybe needs mold remediation? Do you want to handle projects where everything’s being taken down to the studs and they’re adding another thousand square feet? So, it sounds kind of counterintuitive when I say limit, limit, limit, pick a state, pick a market, pick a type of property, but the second you kind of put yourself out there, you’re going to get pitched everything. And so, the closer you can get to that ideal, quote unquote, ideal situation, it’s going to bring the right deal forward faster.
Ashley:
Alex, I think that’s such a great point you made, basically building a criteria. You hear that so often when you’re going after single-family homes or small multi-family. Have your criteria so you can weed through the deals. I’ve never even thought of, as a private money lender, have your criteria set too as to what you’re going to lend on, what kind of return you want. So, thank you for sharing that. Beth, what advice do you have for rookies that would like to get into private money lending?
Beth:
Well, just to add onto what Alex said, I mean, in our book, we actually have a personal assessment that is more of a pre-step to even getting started which allows you to really explore what your personal risk tolerance is, as she said, kind of ring-fence in what you want in terms of a project, a property, the loan size, the interest return that you’re expecting, but also exploring why you’re doing this to begin with because as she mentioned, getting into a real estate meetup room and saying that you’ve got money to lend, you kind of become the most popular person in the room. So, making sure that you understand that you want to do this passively, like I did. I started because I wanted to maintain being a mom first, and boy, it blew up into being an active business really fast, and it was hard for me at first. I think we’re finally in a good state where it can become more passive again, but really understanding why you’re getting into private lending to begin with, and so, that assessment really helps.
The second thing that I would add on is that private lending is not a DIY project. To Alex’s point, it takes a team. It takes a virtual team. It takes a team in place in the market that you’re going to be lending on if that’s not your local market. If you’re going to have some questions around hazard insurance, you might need to make a relationship with an insurance agent that can help vet out the insurance binder for you to make sure that it’s sufficient enough and that if there was a claim on a property that you get paid out. You’re going to need help evaluating projects and properties. That might mean that you need to get some valuation support from a real estate agent or another active investor who can take a look at a deal and give you a second opinion. You definitely need attorneys there. You need a title, an escrow company, or a closer. Some states close through attorneys. But having a whole team ready in place for you is extremely important because private lending starts with a relationship, but it still needs to be handled like a business transaction. There needs to be legal documentation created, signed, notarized, recorded, and put into place first so that nothing happens after the loan originates, or we try to mitigate as much as we can, right?
Tony:
Beth, Alex, I want to ask both of you a question and just give me a quick yes or a no, then we’ll kind of deep dive from there. Beth, have you ever lost money on a private money deal before?
Beth:
No.
Tony:
Alex, have you ever lost money on a private money deal before?
Alex:
No.
Tony:
So, you guys have both been pretty successful with this, and I mean, I’ve shared my journey obviously on the podcast. My second deal that I ever did as real estate investor, this house in Shreveport, Louisiana, lost $30,000, took me a year and a half to sell that stupid thing. So, I mean, there’s always risk in real estate investing, and even as a private money lender, there’s risk there as well. So, the fact that both of you have never lost money in a deal, you’ve been successful, I guess, what red flags should I be looking out for as a new private money lender to make sure that I don’t lose money on that deal?
Alex:
I would say making sure you don’t kind of mix that business with friendship because most people are going to say, because I see it on the BiggerPockets forum all the time, “Hey, my cousin’s best friend has a $100,000 they want to lend to me as a lender. Now I don’t know what the next step is.” And normally they’re just like, “Oh, they’ll give me the $100,000.” So, I would rather that everybody take home the message that things need to flow through the closing table because, like to Beth’s point, there’s going to be professionals that are involved in this transaction that not necessarily you’ve hired them to be on your side, but there’s other people looking out for the wellbeing of the deal. The title company is obviously going to be doing title search which includes some background information, like if there’s federal tax liens, they’re also going to appear on the title report.
So, having those professionals in place and being able to call and ask questions and say, “Hey, this works, does this fit what I’m looking to try and do?” So, I’d really say leaning into that team of experienced professionals is going to be the best way, or even just talking to another private lender and say, “Hey, I got this deal. I’m looking to fund it. This is the parameters. What do you think?” And everybody’s risk tolerance is going to be different. You could post that same question to 10 different private lenders and you’re going to get everything from yes, no, and maybe, and for different reasons from each private lender. So, I would say just really leaning into that network that Beth mentioned is going to be crucial for anybody new to private lending.
Beth:
Yeah, I would add while I haven’t personally lost any principle, nor have any of my investors in my circle, I’ve had plenty of investors or would-be private lenders come to me with stories of having lost principle. I just want to point out first that when people do lose principle, it’s not to any fault of their own. They trusted in the good intentions of others. Sometimes they just get mixed up with a bad player. Oftentimes, there’s a couple of key things that happen. One is the legal documentation just isn’t there. They either have poorly written documentation that doesn’t cover them legally, or there just wasn’t any legal documentation to begin with. I see that a lot. I’m concerned and I’m surprised actually how many deals occur without any legal documentation or promissory note, and then it’s not secured against real estate as well, making it really difficult to go after the borrower after that loan is in place.
So, the other issue that I would say that is even if it is secured by real estate, a really big issue here is that their borrower sometimes just has no skin in the game. Maybe the lender funded a hundred percent of the purchase price, and even then some of the rehab with a promise that they’ll get both an interest income as well as maybe a small equity share when the project is done. The problem with that is that they’re immediately underwater if the borrower goes dark, or maybe a general contractor comes in and scams the borrower to no fault to the borrower, but the GC runs off with a whole bunch of money and the borrower gets upset and just walks from the project. Why? Because it’s too easy. There’s no skin in the game.
So, an equity buffer, which for rookies is measured out in what we call an LTV or a loan to value which really means how much is the loan amount against how much it’s worth. So, if you have a $100,000 loan on a property that’s only worth 75,000 because you gave $25,000 for a cosmetic rehab also, as a lender, you’re immediately underwater. Your loan to value is in excess of a hundred percent. So, I really prescribed having a really significant equity buffer in place. We typically do our loans at 65 to 70% loan to value, and that gives you a 30% equity buffer in case something happens. And then we also try to require the borrower to come to table with some skin in the game, whether that’s in the form of a down payment, sometimes they’ll collateralize another property that they own, like a rental, in order to have some sort of tie into the project themselves that makes them want to perform.
Ashley:
Beth, in that scenario, do you allow them to go to another private lender to make up maybe another 20%. Say you’re lending them 60 and then they bring an additional 20 of their own. Do you allow that, or is it just, you’re bringing 60, and then they have to bring the 40 on their own, as in their own funds as you’ll look for proof of funds?
Beth:
Sure. Yes, we have. I will say it’s very circumstantial. There have been a few cases where the seller was willing to carry back some money in second position, meaning if we’re going to fund 600,000 out of a million-dollar deal, the seller says, “I will carry back that $400,000 behind your loan for a five-year term at 5%.” And if they’re willing to do so, on occasion, we’ve let that happen for experienced borrowers. I wouldn’t say that’s something that I would recommend for a lot of lenders. And one thing I don’t really like and allow is to have private lending fund that remaining balance, the down payment, also known as gap funding. Whether that’s secured or not, it’s just, again, they don’t have any skin in the game, and so, the borrower could easily walk. I try to make sure that I understand where their down payment’s coming from, and I’ll let Alex chime in on this because I know that she has a little bit more personal experience with these types of scenarios.
Alex:
Yeah, we often see new real estate investors working with, again, people in their networks who are new lenders and they say, “Oh, I have $20,000. I want to be a lender on this deal, and I’m going to do gap funding.” And a lot of times what they end up doing is they just give this active investor $20,000, they may or may not even get a promissory note back, and then they say, “Hey, here you go. This is the 20% down that you needed for that $100,000 house,” and while we might have been in a fantastic bull market for the last 18 years, however long it’s been since 2008, now that we’re kind of in a place in the market, in the economic cycle where that just rampant appreciation asset value, that’s going to be potentially a source that’s going to eat away at your equity buffer.
So, right now, your loan might be at 80% loan to value, but six months from now when they finish the rehab, if the market continues to soften, maybe you’re now at 90% or maybe you end up at 100%, and if you are someone that’s willing to take on that second lien, if you even put a lien on the property for that extra 20,000, you’re very easily going to be underwater. If anything goes wrong with that property, the tenants damage it, it’s has a fire and burns down and they don’t have adequate insurance, the market gets soft, there’s things that can happen that are outside the borrower’s control where if you’re providing that gap funding, you’re automatically underwater. And just for my personal risk tolerance and where we are in the economic cycle, doing that 20% down gap funding for another active investor so they can go and get a loan for the other 80% is just too far out of my risk tolerance with where we are in the market right now.
Ashley:
Well, thank you guys so much for sharing that with us. All of the information today has been great. So, if anybody wants to learn more, where can they find your book?
Alex:
They can find the book on the BiggerPockets bookstore. It’s available now, and the Audible and ebook version will be available on Amazon. There is an ebook version also on BiggerPockets, but the Amazon and Audible will be available middle of August. I think August 16th is the release date for those. So, anybody wants to listen while they’re driving around town, you can get the Audible version in a couple weeks.
Ashley:
Awesome. And you guys can go to biggerpockets.com/bookstore to check out Lend to Live, and also all the other BiggerPockets books. Beth, where can people reach out to you and find out some more information about you?
Beth:
Well, I’m on BiggerPockets so they can reach out to me there and message me there. I also have a website, flynnfamilylending.com. That’s my private lending matchmaking business, and so, I can be reached there as well.
Ashley:
And Alex?
Alex:
You can reach me at our email address. It’s [email protected], and the two is the number two. That’ll reach either one of us. Please feel free to reach out and I’m on LinkedIn and BiggerPockets as well. So, just look for my name and happy to have a connection there and send a message there as well.
Ashley:
Well, thank you guys so much. We really appreciate you coming on and giving us this little crash course on private lending, and rookies, definitely check out this book because even if you have ways to finance your first couple of deals, you can never have enough money in real estate. So, this will be a great resource to help you get started, whether you want to find private lending or you want to be a private lender. Well, Alex and Beth, thank you so much for joining us today. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram, and we’ll see you guys back on Wednesday for another episode of Real Estate Rookie.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Opinion: Ginnie Mae’s revised requirements reduce risk
Ginnie Mae’s recent announcement regarding their Single-Family Applicant and Issuer Financial Eligibility Requirements represents a major step forward in reducing a potential systemic risk to the housing financial system.
Since the 2008 financial crisis, a significant structural change has taken place which over time threatens the long-term stability of housing finance. The growth in the number of nonbank financial institutions originating and servicing mortgages and their industry concentration is an unintended consequence of the pull-back in the mortgage business by depository institutions and for some time has represented a gaping hole in managing systemic risk for the industry.
Nonbanks, for example, account for more than 87% of all Ginnie Mae originations and more than two-thirds of GSE originations. The presence of nonbanks enabled the housing finance system to heal after the crisis without further disrupting markets, however, those firms generally pose significantly greater counterparty risk to Ginnie Mae.
Ginnie Mae is exposed to counterparty risk in several ways. Should an issuer fail, Ginnie Mae is responsible for passing along payments to investors in Ginnie MBS. Should a servicer fail, Ginnie Mae could experience problems in transferring servicing along with a host of other operational challenges.
For years, Ginnie Mae has been woefully under resourced, which leaves the agency extremely vulnerable to the failure of a large issuer or servicer. Were that to happen, the market reverberations would be immense.
Mortgage-specializing nonbanks collectively pose risk due to a number of factors; a monoline business model that generates more overall earnings volatility from the mortgage cycle than more diversified depositories, greater dependency on less stable sources of liquidity, heavier investment in riskier mortgage servicing rights (MSRs) assets, and a lack of federal safety and soundness regulatory oversight.
Federal safety and soundness regulatory requirements for depositories, including risk-based capital and liquidity ratios, are extensive for the banking industry generally and have become even more so for the largest banks. As a result, these institutions face a great deal of scrutiny on their risk-management practices, governance and culture ,which as we learned in the last crisis were key ingredients to excessive risk-taking.
In the aftermath of the crisis, banks were forced to significantly raise capital, retool their risk management functions and significantly improve their mortgage underwriting and servicing practices and infrastructure. To be fair, this level of regulatory oversight was needed due to the criticality of banks to the financial system and potential exposure FDIC has by way of federal deposit insurance. However, nonbank counterparty risk exposure for Ginnie Mae is very real and critical to contain.
To put some of this nonbank counterparty risk into focus, consider these statistics. The top 10 holders of MSRs account for 62% of total MSRs for loans collateralizing Ginnie MBS. Only two of those 10 are depositories. And the top 30 companies account for 83% of those MSRs.
MSRs are notoriously tricky to value and are treated as a Level 3 mark-to-model asset. Estimating value is highly dependent on a whole host of assumptions such as what discount rate to use as well as models to project interest rates and estimate voluntary and involuntary prepayment rates over time. In a market where interest rates can move quickly at times, MSRs pose significantly greater balance sheet volatility and are even more concerning when they comprise a large share of a company’s asset base as they do for several large nonbanks.
There should be no surprise then that Basel capital requirements impose a 250% risk weight on bank MSRs not deducted from common equity tier 1 capital (CET1).
It is well-established that the credit profile for Ginnie Mae borrowers is riskier than for GSE loans. On two important dimensions of credit, median FICOs and debt-to-income (DTI) ratios of loans originated by nonbank have been worse than depositories.
Further, in an empirical study of bank and nonbank mortgage risks, I found that controlling for all other factors used in underwriting a borrower, loans originated between 1999-2015 by nonbanks were 1.5-2.2 times more likely to become 90 days past due or worse than other originators. While no specific factor can be attributed to this result, it may reflect issues related to a lack of federal safety and soundness oversight that can manifest in loan manufacturing quality issues over time.
We saw this with several large nonbank institutions during the 2008 crisis. The combination of an overall higher credit risk profile for Ginnie Mae borrowers than the GSEs and higher credit risk attributes of borrowers with loans originated by nonbanks, further punctuates the need to ensure strong net worth, liquidity and risk-based capital requirements on these firms.
Ginnie Mae’s revised financial eligibility requirements provide a sensible way to manage their counterparty risk in a consistent manner that creates a more level playing field for all market participants.
Some will undoubtedly argue that tightening liquidity, net worth and capital requirements will shrink the size of the market and thus impose unnecessary hardship on prospective borrowers. Achieving a balance between equitable access to the mortgage market and prudent risk management practices is perennially an issue when developing new industry rules.
When the GSEs and FHFA announced they would be imposing risk-based capital requirements on private mortgage insurance companies years ago, similar concerns were expressed, but over time, those requirements have turned out to be beneficial to the GSEs, the mortgage insurance companies and the market at large for strengthening a critical segment of the housing finance system.
Nonbanks have served the housing finance system well in the years since the 2008 financial crisis and their prominence in mortgage origination and servicing is recognized. Their monumental success in this area, however, poses considerable risk to Ginnie Mae and the housing finance system in general.
By tightening their new financial eligibility requirements, Ginnie Mae has taken a step in the right direction to reduce their counterparty risk exposure as well as systemic risk to the housing finance system.
Clifford Rossi is Professor-of-the Practice and Executive-in-Residence at the Robert H. Smith School of Business at the University of Maryland. He has 23 years of industry experience having held several C-level executive risk management roles at some of the largest financial institutions.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Clifford Rossi at crossi@umd.edu
To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com
The post Opinion: Ginnie Mae’s revised requirements reduce risk appeared first on HousingWire.
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Savage: Even with sales down, home prices up 10.8% 
Today the National Association of Realtors reported that the trend of declining existing home sales, which we have seen since mortgage rates rose, is getting worse. But that isn’t the worst part of the data line! The shocking stat (for some, not for me) is that even with the significant decline in sales since January of 2022, the median sales price is up 10.8% year over year. The savagely unhealthy housing market continues — a function of starting the year at all-time lows in inventory.
From NAR: Total existing-home sales slipped 5.9% from June to a seasonally adjusted annual rate of 4.81 million in July.
I was concerned about 2022 home-price growth because by October of 2021, I knew we would start 2022 at all-time lows in inventory, which can create forced bidding action. I am not a fan of forced bidding action under any circumstances, but when it’s due to a raw shortage of homes and not a credit boom, as we saw from 2002-2005, it’s even worse.
NAR: The median existing-home price for all housing types in June was $403,800, up 10.8% from July 2021 ($364,600), as prices increased in all regions. This marks 125 consecutive months of year-over-year increases, the longest-running streak on record.
On the good news, inventory is rising, which is a positive. The parts of the country where inventory levels are at peak-2019 levels or higher are officially off the savagely unhealthy market list because they have plenty of inventory to have a more functional housing market. However, as a nation, we aren’t there yet.
NAR: The inventory of unsold existing homes rose to 1.31 million by the end of July, or the equivalent of 3.3 months at the current monthly sales pace.
My rule of thumb is that I will take the savagely unhealthy housing market theme off once we can touch 2019 peak levels of 1.93 million homes for sale and have at least four months of supply, which would mean a balanced housing market in my book. I am looking for a range of 1.52-1.93 million, something I have talked about for some time post-COVID-19. Because inventory is very seasonal — it falls in the fall and winter and then rises in the spring and summer — it’s not going to happen in 2022, but hopefully, we can get there next year.
NAR lists total current inventory at 1.31 million. Historically we are between 2-2.5 million. The peak in 2007 was roughly 4 million.
One of the most painful data lines to watch over the last two months has been the median days on the market, which have now broken to all-time lows. In a regular housing market, we are over 30 days, which is why I want the total inventory to get back to 2019 levels to have more balance nationally.
NAR: First-time buyers were responsible for 29% of sales in June; Individual investors purchased 14% of homes; All-cash sales accounted for 24% of transactions; Distressed sales represented approximately 1% of sales; Properties typically remained on the market for 14 days.
To give you some historical perspective here, you can see why I am using the term savagely unhealthy, as the median days on the market have never been lower in history.
Higher days on market mean choices for buyers and sellers. We never focus on the seller aspect because it’s easy to forget that a traditional primary recent home seller is also a buyer. Now that rates are up a lot, some sellers can’t afford to move or have delayed moving.
However, this is a good thing for others that need to move, as it means more inventory and more choices. This is one of the reasons I haven’t been the biggest fan of the housing market in recent years: we lacked options and time for people to have a more traditional home-buying and selling process. Over 30 days is preferable; anything that is a teenager isn’t a good thing at all.
This year, we saw that housing acted poorly when mortgage rates exceeded 6%. Of course, we have seen a 1% move lower and a lot of back-and-forth action on rates daily. If mortgage rates can head toward 4% again, the market should act better. However, until then, the market is still dealing with the affordability shock to demand as rates jumped massively this year. This, on top of the 44% + home-price growth since 2020, is a meaningful hit on affordability.
Purchase application data was down 1% weekly and down 18% year over year. The four-week moving average is down 17.75%. I had anticipated four-week moving average declines of 18%-22% once mortgage rates got above 4%. That didn’t happen, but rates above 5% did the trick.
We will soon enter a time where the year-over-year comps will be more challenging because we will have a higher bar to work from. Last year starting in October, mortgage demand started to pick up noticeably and pushed the existing home sales data toward 6.49 million at the start of this year. Some of the year-over-year data can look weaker than the 18% decline trend we have recently just due to higher comps.
Today’s existing home sales report isn’t the best due to home-price growth still being in the double digits. We should see less price growth in the upcoming months. However, this year, even with the big hit on demand and the housing market recession, we are still seeing unhealthy home price growth. I talked about this recently on CNBC.
We still have home prices growing faster this year than what we saw in the previous decade, and this has to do with the fact that we started the year at all-time lows in inventory, and we are working our way back to normal. Remember, normal inventory levels is a good thing, not a bad thing, because we all want a B&B housing market — boring and balanced — not savagely unhealthy.
We’re covering this important topic at our HousingWire Annual event Oct. 3-5 where Logan is a featured speaker. Register here to join us in Scottsdale, Arizona.
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2 new private-label deals backed by rentals hit the market
After a July doldrums during which there were no agency-eligible private-label securitizations (PLS) backed by mortgages on residential investment properties, the ice was broken this month with a new offering sponsored by Blue River Mortgage III LLC.
The prime PLS offering, dubbed GCAT 2022-INV3, is backed by a pool of 1,259 mortgages valued at $423 million. More than 97% of the loans in pool are agency-eligible investment properties, with the balance second homes.
In addition, a separate non-prime (non-agency) private-label offering backed by mortgages on investment properties hit the market in August as well. That offering, Verus 2022-INV1, is a $389.5 million deal with the underlying collateral consisting of 853 rental-property mortgages.
The major loan originators for the GCAT offering, according to KBRA’s bond-rating presale report, were loanDepot, 35.8%; Homepoint, 28%; and Arc Home, 21.6%. The bulk of the loans by volume in the offering were originated in California, 29.8%; New York, 11.6%; and Texas, 10.4%. Deal sponsor Blue River is a fund managed by Angelo, Gordon & Co. L.P., a global asset-management firm with some $50 billion in assets under management.
The Verus offering is sponsored by VMC Asset Pooler LLC, which along with Verus Mortgage Capital, is an affiliate of Invictus Capital Partners LP — a real estate credit-focused alternative-asset manager.
“All of the loans in this transaction [were] originated by various lenders, none of which comprises more than 10% of the pool,” a Kroll Bond Rating Agency (KBRA) presale rating report on the Verus deal states.
The bond-rating presale report does not identify any of the lenders by name. The bulk of the loans by volume in the Verus PLS offering were originated in California, 37.2%; Florida, 18%; and New York, 10.4%.
The two new investment property-backed deals so far in August are a sign the PLS market is still working as a liquidity channel for some deal sponsors. The pace of deals in July and so far in August, however — a total of three non-prime and only one prime deal — is down considerably from earlier in the year, based on PLS deals and data tracked by KBRA.
Year to date through mid-August, there have been 28 prime (agency-eligible) private-label securitizations (PLS) backed by loans on investment properties valued at $12.8 billion and nine non-prime deals backed by loan pools valued at $2.6 billion, according KBRA.
In total for the year through mid-August, then, across the prime and non-prime markets, a total of 37 PLS securitizations have come to market secured by $15.4 billion in investment-property collateral — primarily single-family rentals owned by non-institutional landlords.
Over the same period in 2021, there were a total of 15 prime PLS investment-property deals valued at $6.1 billion and five non-prime PLS offerings backed by $1.1 billion in investment-property mortgages. The second half of last year started to heat up on the deal front, however, and for all of 2021, with prime and non-prime deals combined, there were 68 PLS offerings backed by investment-property loan pools valued at some $28.7 billion, KBRA’s data shows.
So, as of mid-August 2022, the PLS market is on track to meet or exceed 2021 performance with respect to investment-property deal count and volume. In fact, through June of this year, an average of more than five PLS investment-property deals per month hit the market across the prime and non-prime sectors.
Then came July, and deal flow in the investment-property residential mortgage-backed securities (RMBS) sector slowed to a crawl, with only two non-prime PLS deals and no prime securitizations, KBRA’s data shows.
A recently released report by Atlanta-based digital-mortgage exchange MAXEX echoes KBRA’s data. The report attributes the PLS deal slowdown in July to risk aversion, as fears of a recession linger, and to shrinking originations in the face of interest rate volatility.
“There were no agency-eligible (prime) investor securitizations in the month of July,” the MAXEX market report states. “A combination of factors, including [loan] supply, widening spreads and low-risk appetite have tempered issuance.”
It remains to be seen how th balance of August will play out on the deal front. MAXEX’s report, however, offers some positive news on the loan-trading front.
The loan aggregator, which serves some 320 bank and nonbank originators and more than 20 major investors, reports that it “saw an increase in investment-property loan locks” through the platform in July. That’s an indicator that the pace of offerings may start to pick up again this fall — given loans are typically seasoned for several months prior to securitization.
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A Beginner’s Guide to Analyzing Big Deals & Building a “Bulletproof”
As an investor, finding and closing on a deal is only the beginning, and it sets the tone for how the rest of the deal will go. So what criteria should you have to make finding a profitable deal easier? Once you find a deal that’s promising, how do you do your due diligence before submitting an offer? In today’s episode, Kenneth Donis shares his bulletproof process for finding and underwriting profitable deals.
Kenneth is the Head of Marketing and Acquisitions in the Donis Brothers’ operation. The Donis Brothers have a little more than 1,000 units under their belt and show no signs of slowing down. Kenneth is responsible for finding those deals, underwriting them, and meeting with brokers. With a growing portfolio, Kenneth’s process has become more efficient, and the proof is in their success.
Kenneth breaks down his process into three parts—creating criteria, analyzing the deal before submitting the offer, and submitting a letter of intent. He explains how to create a buy box based on your budget and the importance of ensuring your overhead is covered. Taking to heart just a few of the tips that Kenneth shares today could put you on the fast track to closing on your next big investment property!
Ashley:
This is Real Estate Rookie episode 200 and niner.
Kenneth:
So people are realizing that there’s something going on in the economy. So I think it’s bringing fear to the market. Kind of what we’ve been doing is just trying to educate, because if you keep your money in the bank right now, it’s not making anything, it’s actually losing money, if you want to be, technicalities. Also, if you put it in stocks, I mean that would be very fearful. I would be scared to do that. And then crypto, I mean, that would be another thing that I would say was probably not the best idea. So where is the best place to put the money? I personally would say, and this might be biased, but I think it’s real estate just because it would hold its value, at least to an extent.
Ashley:
My name is Ashley Kehr, and I’m here with my cohost, Tony Robinson.
Tony:
And welcome to The Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and education you need to kickstart your investing journey. Now, usually I kind of start this part of the episode with reading some highlights from recent reviews that we’ve gotten on the podcast, but today I’m going to switch it up just a little bit, and I want to read some comments we got on YouTube for one of our recent episodes we put out on YouTube. And in that episode, Ashley and I talked about how one of the reviews talked about how boring Ashley and I are, and we like to read some of the bad reviews from time to time as well. And we just so much appreciated how the rookie community came to have our back.
So someone said, I love their chemistry, I also love the rookie podcast because every guest provides tangible lessons learned. Someone else said, imaginary. Derek said, I love you guys and you’re genuine chemistry. The show is amazing and extremely helpful. Please invite me to the next pool party. Someone else said, I love Ashley’s laughing. It’s so genuine. Please don’t stop due to negative reviews. You seem so much fun. And the last one, this one is from Paul Garza says, don’t change. I learn from your intro. I like to hear what you guys are personally working on. Makes me think of different situations and angles. So guys, we love that you appreciate the boring banter between me and Ashley. And I love that we now have a new name for the intro of the podcast, the boring banter. So why don’t we get into some for today, Ashley, what’s new with you? Give me some boring updates.
Ashley:
Well, first of all, I want to say, I love you guys so much and thank you. Those really warmed my heart, reading those messages. And even if everybody hated my laugh, I cannot make it go away. I can’t help it. So thank you guys. We really appreciate you guys taking the time to make those comments for us.
Tony:
So what’s new, Ash? Give me some boring banter about Ashley Kehr’s universe these days.
Ashley:
Well, I’m super excited because Tony and I are headed to Denver, where we are going to do a podcast recording together, live in person, and then we are also hosting a meetup in Denver, so that is going to be August 15th. I’m not sure when this episode is airing, before or after, but if you guys were there, it was great to see you. I think this will come out after and then, but yeah, it’s always great to get together with Tony and Sarah. And then after that headed to Tony’s short-term rental conference. And then it will be BPCon, so super excited for it to be in sunny San Diego this year. So if you guys haven’t checked it out, go to biggerpockets.com/events, and hopefully we’ll see you there.
Tony:
Lots of travel, lots of good things happening. I guess the only update that I have on the business side is that we’re, the city that we invest in, actually, I think we did this for Rookie Reply about the permit changes for some of the cities we invest in.
Ashley:
Yeah. In Josh [inaudible 00:03:36].
Tony:
Yeah. So that’s causing us to kind of adjust our game plan, but there’s a lot of folks who are now, and this has always been the case of short-term rentals, people that are afraid to invest in cities where the regulations are a little bit more stringent, but honestly, I’ve never seen that as a bad thing, if anything, it just kind of weeds out some of your competition. So it means there’s less people that are going to be looking to buy, which means, A, you have a little bit more leverage when you’re purchasing properties and then, B, when you’re actually operating, obviously there’s less short-term rentals. That means there’s less supply, which means there’s potentially opportunity for you to charge more and higher prices, so.
Just another day in life of a short-term rental host, but trying to keep things moving. But anyway, we got a good guest today, right? So this is the end of the trilogy. We have Kenneth Donis and we’ve had all three of the Donis brothers on the podcast. So we have them together in episode 175. So Kenneth, Jeffrey, and Kerwin all came onto that episode together. And then we’ve been bringing each brother on separately to kind of talk about their specific parts of the business. So again, they were all together on 175, then Jeffrey was on episode 193, Kerwin was 199, and then we finish off today with Kenneth on 209. Kenneth, welcome back to the podcast, brother, excited to have you on kind of finishing out the trilogy of the Donis brothers. How you been, man? How you doing?
Kenneth:
I’m doing well, man. Thank you guys so much for having me. How are you guys doing?
Ashley:
Good.
Tony:
Man, trying to keep up with you. You and your brothers just travel all over the place. I see you guys posting pictures at this conference and that conference and seems like you guys are out there networking and making connections, man.
Kenneth:
Yeah, absolutely. We definitely try to have fun with it, trying to meet a lot of people. In this business it’s really about who you know, not what you know. Well, I would say it’s about what you know too, but definitely a lot more on who you know, so.
Ashley:
Kenneth, before we get into this episode anymore, can you just give a little bit of information about yourself and what you’re doing in real estate right now? Just in case somebody didn’t listen to your previous episode.
Kenneth:
Yeah, absolutely. Well, like they said, and thank you, Tony, for the introduction, Kenneth Donis here. One of three of the Donis brothers. I’m Head of Marketing for our company, Donis Investment Group. Currently we have a little north of a thousand units in our portfolio right now, looking to acquire some more. So we’re slowly growing, but yeah, thank you guys so much for having me.
Ashley:
And Kenneth, let’s break that down because I don’t want everybody to think that we brought on some expert who’s been doing it for 20 years and has built up a thousand units, and not to say you’re not an expert, but just tell everyone how long you’ve been doing this and how exactly you acquired those thousand units?
Kenneth:
Yeah. So my brothers and I started in real estate wholesaling a few years ago and we’ve been at multi-family for going on two years now. So it’s been a slow burn, but we’ve been able to be co-sponsored on a few deals alongside some of our partners we’re in a bigger mastermind group called Think Multifamily, so we definitely give a big shout out to them. That’s pretty much how we’ve been able to be a part of bigger projects, to be quite honest.
Ashley:
Okay. So let’s break that down a little bit. And confirm or deny this if I’m explaining this correctly. So within that group of people or other people that you’ve partnered with, you have either brought the deal or you’ve provided some kind of value to be a general partner in the deal. So it’s not like you’re going out and you’re just taken down a thousand units, the three of you by yourself, but you are strategizing as to how you can provide value and to get a piece of the pie. Is that correct?
Kenneth:
Yes, that is correct. So in this business, what we came to learn is in multi-family it’s really a team sport and in team sports you have different people that play different roles in different positions. So in different various of acquisitions that we’ve had we’ve helped out with different things. So yeah, I mean, it’s just a bunch of, pretty much, partners and we all have our own role and we all have our respective areas in which we can help out.
Ashley:
Kenneth that is great. Realizing, so young and so new into real estate, investing is leveraging those partnerships and obviously it’s turned you guys into experienced investors. You’ve built up a large portfolio and you’ve made tons of connections. Today, we want to focus on your piece of your company though, the marketing and the acquisitions, so let’s kind of start there. What’s the first thing you want to go over today, that is part of your job role?
Tony:
Sorry, Kenneth, really quickly before you jump into that. If you can, just for the listeners that aren’t yet familiar with the phrase syndication, just give us a quick rundown of what that is and then lean into to the part that you focus on.
Kenneth:
Yeah, absolutely. So basically the word, syndication, is just gathering money and then going out and buy something. So in this case, apartment syndication, so we’ll go out, gather the equity. Of course, we’re taking debt on these properties. So we’ll go out and gather the equity in order to buy apartment complexes. And then, of course, our investors that invest with us, they get a return on their investment or the money that they put into the deal, so that’s just kind of what it is in a nutshell. What I do is I’m Head of Acquisitions, so I am the one underwriting. Well, first off, meeting with brokers, getting deals, underwriting deals, touring the deals, pretty much all upfront, trying to find a deal, trying to find an opportunity in which we can provide our investors.
Ashley:
So the majority of these deals, are you guys the ones that are finding them and then bringing them to other people that are already general partners on a deal to build a team, and how are you selecting as to who you take your deal to?
Kenneth:
Yeah. So, like I said, in this group, we have been co-sponsors, meaning that we’ve helped out on various other items. So we’ve had other partners that actually found the deal. We’re actually working on our first deal that we’re working on that we found, or I found, in Atlanta. But as far as how we figure out what to take to our investors, well, first off, we go by market, we just want to… We have a buy box, right? So it’s kind of the similar to single family. You can look at every single multi-family apartment, but I mean, there’s so many of them that it would be too broad. So you have to narrow it down to what you’re looking for and what you would be willing to, I guess, put up with, right? So, one, the market, so whether you want to invest in a tertiary market, meaning it’s not as populated, it’s a little bit smaller, maybe not as much activity.
Or a primary market, something like Charlotte or Dallas, or like a larger market, that’s a little bit more competitive, but obviously they have steady rent growth, steady job growth. And then you go into looking into the asset itself. So do you want to invest in a little bit older assets, ’60s, ’50s product, and either, usually with those products, there’s sometimes a lot of problems with like plumbing and electrical, just because everything’s so old, or do you just want to do newer assets? Things that were built in the 2000s or late 1990s. So that’s kind of the buy box. Now, it also depends on how many units you would like to acquire. So if you’re syndicating, you could pretty much syndicate any amount of units, but obviously the more units you have, the larger the purchase price will be. So depending on your capacity or if you’re just buying it yourself, you can buy a few units and, or continue to buy larger, a hundred plus, 200, 300 units. So I think narrowing it down is very important.
Ashley:
Kenneth, how are you creating that criteria? So for example, part of your criteria is it must be at least like a hundred doors or something like that. How did you come up with that number? What’s, if someone out there is looking to go and do multi-family, how can they be like, okay, I know that I can maximize my return if I’m getting over a hundred units or I want to be in a B to A-class market. What are some tips and tricks you can give to people to help them actually define what their criteria is going to be, instead of just saying, oh, I know that I want luxury units? What’s the best way they can actually figure out where they’re going to get the best return?
Kenneth:
Yeah. Great question. And I think, I like to say, honestly, if the numbers make sense, I think any deal is a good deal. So if it’s a good deal, I think, doesn’t really matter about the unit size. Obviously the larger, the better, because you get a little bit economies, the scale, meaning you’re not spending more per unit, so you have a certain threshold as far as expenses, so a certain amount of units cover your expenses, if that makes sense? So after you surpass a certain threshold within the unit sizes, you’re not really increasing the amount of expenses, so you’re just making more profit. But I would say, it really depends on your situation.
If you think you have, if you’re an executive that is in a large corporation or a large company and you have a network of people that are making 100, 200, maybe more, thousand dollars a year, there’s a potential for you to be able to syndicate a lot of money and therefore you can go out and buy a larger asset. But if that’s not your case, if maybe you’re just at your job and maybe you’re not surrounded by people that are a little bit higher-net-worth, you can go out and buy a smaller apartment complex or a quadplex or a duplex. So it really depends on your own situation. That’s what, at least, what I would say, but it’s all down to the numbers, right?
Ashley:
So the first thing you would say to look at is what is your budget, almost. So if you’re going to be doing a syndication, if you’re going to be raising money, how much money can you raise if you’re going to be borrowing private money? How much is that? If you’re getting bank financing. How much do you believe that you’ll be able to get for a property and then kind of look at what the average cost is for that many doors. And this all applies to even single family homes or duplexes too. So you can narrow your criteria, your buy box, to look at properties that are within your budget.
Kenneth:
Exactly.
Ashley:
And then also you mentioned too, how many doors are going to cover your expenses? So look at the overhead. So if you have a property that has 20 units and it’s going to cost you X amount to have the driveway snow-plowed, but you can look at a property that has a hundred units but it’s still going to cost the same because it’s the same size driveway, or something like that, to have it plowed. I think that’s also, that’s great advice right there too, is to look at what is the overhead of the expenses where they’re most likely not going to change as those units increase.
Kenneth:
Yes. That is a hundred percent correct. And to touch on your first point. So it’s not just, I would say not really just your budget. I would also say, like I said, this apartments is really a business in which it’s who you know, because I personally don’t have the net worth or the liquidity in order to sign and qualify for these loans but I have a network of people that can sign on these loans and they have the experience, they have the net worth, they have the liquidity.
So, if you surround yourself or go out and meet people that can KP or basically be a key principle and sign on these loans or they could tell you, hey, I can write a cheque for, I have investors that can write a cheque for 10 million or whatever the amount, 1 million. So it’s also about who you know. So if you can, not necessarily how much money you have or your direct… Not exactly just how much money you have directly, but how much money around the people that you know have, and, or their net worth, pretty much.
Ashley:
Isn’t it funny, at least for me growing up, I was always taught, never co-sign for anyone, never co-sign on an auto loan. And now, as investors, we want to be the person that eventually co-signs for a $10 million to loan for a property. But yeah, it’s just funny how that changes.
Kenneth:
Yeah. I, a hundred percent, agree. And the reason is because, one, this is good debt, right? So this debt, as long as the asset keeps performing, that debt that you’re taking out is making you money, right? So we’ve always been taught, obviously car loans, house, depending on your perspective, those might not be the best kind of debt. And two, you get a slice of the pie for just signing on the loan. And I mean, yes, it’s somewhat of a risk, but these are all a majority non-recourse debt, meaning that as long as you’re not committing fraud and, or just operating the property correctly and you’re not doing anything that would pretty much trigger a bad boy carve-out, they can’t come after you personally. So you’re using your balance sheet and there’s, I would say, I wouldn’t say that there’s no downside or no risk, but there’s very minimal risk, I would say. So that’s why people do it.
Tony:
Yeah. So Kenneth, you’ve done a great job, but I just want to kind of like rephrase it, that way people would see it a little bit more clearly. So what are all the things that should go into someone’s buy box? So you talked about like number of doors, you talked about condition. What are the other few pieces someone should really narrow in on when they’re talking about their buy box?
Kenneth:
Yeah. So area, I’d say median household income, number of doors, which would kind of correlate with purchase price. So I think those kind of go hand in hand. Year built and yeah, those are pretty much, I would say are… And crime, but I think that kind of goes hand in hand with the area and stuff.
Tony:
So, I mean, and obviously you’re looking at price as well, right? You know that, hey, I’m not going to buy a property that’s a $100,000, I’m not going to buy a property that’s $100 million. So how are you determining what price point that you’re going after? Because since this is a syndication, obviously you don’t have the money in the bank today. So it’s like, how do you know what’s a reasonable price point for you to get under contract that you can then go out and raise money for?
Kenneth:
Yeah. Great question. And I think, so we kind of have an understanding as to, in our network, how much money we could put together if we had a deal that checked all the boxes, pretty much so to say. So if it’s in a great area, there’s job growth, population growth, the median household income is good, the asset is not old, doesn’t necessarily need a lot of work, there’s not a lot of crime. So if it checks all the boxes, what can our partners, some of our partners or the people that we know, how much money do we think we could bring to the deal? So that’s kind of what we look at first because, obviously, we’re bringing the equity, you’re raising the equity so that you can get the loan. And that’s kind of how we kind of reverse engineer to see, okay, well, this is our maximum purchase price, or at least this is where we feel comfortable.
Tony:
So there’s always the issues to you, Kenneth, with soft commitments, like soft commitments versus money wired, right? You can have one money for the soft commitments, but it’s going to be a different number when the money actually gets wired in. So what kind of buffer do you typically kind of look for? Right. It’s like, I don’t know, say for example, you’re buying a property and, we’ll just use round numbers, so it’s easier, but say you’re buying a property that’s a million dollars and say that your down payment and what you need comes out to, I don’t know, $400,000, what you need to close and execute your business plan. How much would you want to see in soft commitments before actually getting that property under contract to make sure that you can close on it?
Kenneth:
Yeah. I would say probably close to double. Well, I wouldn’t say double and that’s because… Yeah, I’d probably say maybe like three-fourths more, so let’s say like 600, likely. So we have a little bit extra that’s, I think that, that would be a safe, comfortable number.
Tony:
Okay. And then one last question on the money raising piece, we can keep moving. So given where the market is at today, I think there’s a lot of fear and uncertainty amongst some investors. Some people understand that this is a good time to buy because there’s less competition. Other investors are a little bit more frightened. How is the current market cycle impact, A, your underwriting in general, but then, B, your ability to go out there and raise the funds that you guys need?
Kenneth:
Yeah. So two huge things that just come to mind. A few, I’d say like six to eight months ago, we were getting 75, 80% leverage on, pretty much all day, on any asset that we were looking at, as long as the area was a good area. Nowadays, we’re getting quoted 65% leverage, 65 to 70% leverage, which obviously means that you need to raise more money. And then I would also touch on with everything going on in the pullback that we’ve seen in stock market, crypto and people, it’s an obvious that what, I don’t know if it was obvious, but I would say a lot of people are starting to realize that there’s less loan applications being applied for, I guess, for people in search for homes. And this is because interest rates are going up and that therefore correlates with the amount that you’re going to be paying per month.
So people are realizing that there’s something going on in the economy. So I think it’s bringing fear to the market. So I think kind of what we’ve been doing is just trying to educate, because if you keep your money in the bank right now, it’s not making anything, it’s actually losing money, if you want to be technicalities. Also, if you put it in stocks, I mean that would be very fearful. I would be scared to do that. And then crypto, I mean, that would be another thing that I would say is probably not the best idea. So where is the best place to put the money? I personally would say, and this might be biased, but I think it’s real estate just because it would hold its value, at least to an extent.
Tony:
Yeah. Just one follow up on that.
Kenneth:
Yeah.
Tony:
Can’t remember which hedge fund it was. It was either Blackstone or one of those big hedge funds. And they recently announced that they raised $30 billion for a real estate fund they’re going to be launching here shortly. And I think that was like one of the biggest raises they’ve done when it came to real estate. And one of their big selling points was that real estate is one of the best hedges against inflation. And I think that’s why there was so much interest and why they were able to garner so much investor capitals because real estate is one of the best ways to make sure that your capital, at least paces with, but can oftentimes outpace the rate of inflation.
Kenneth:
A hundred percent. I definitely agree. I mean, there’s a lot of different asset classes or investment vehicles that you can pretty much invest in, but we’ve, especially now, we’re all starting to realize, well, I guess I kind of knew this, but a lot of people are starting to realize that they aren’t as secure as you would think. And so there’s all this money that is now starting to be pulled out of these markets and they’re sophisticated enough to know that they don’t want to just leave their money in the bank. So they’re all chasing after an asset class that has been proven to pretty much beat inflation year by year.
Ashley:
Yeah. The only thing I would add to that is with putting money into the stock market, I think that if you are going to hold your money in the stock market for a long time, now could be a great time because if you look at the 30-year history of the stock market, especially index funds. Pretty much all my stock market money is in Vanguard Index Funds. And I still think that’s a great way to diversify if you don’t need your money within the next maybe several years, I think that you can see some growth there. But still 100%, real estate is still my favorite investment strategy that there is because you have so much more control over it.
Kenneth:
I agree. I mean, you don’t take a loss until you sell, right? So.
Ashley:
Yeah. So Kenneth, now that we’ve kind of talked about what your buy box is, your criteria. What is the next step? You find a property that fits that criteria, what happens next?
Kenneth:
Yeah. So there’s a underwriting process and a lot of people can do this on back of the napkin kind of thing, but we usually use an analyzer. So we go through our analyzer, we analyze the deal. There’s a lot of steps, I guess you could say, that you would want to go through and check out to make sure that these numbers make sense.
Ashley:
Kenneth, so when you mention your analyzer, is this like a software? Is this like a spreadsheet you guys put together? What exactly is that?
Kenneth:
It’s a spreadsheet. And like I said, I’m a part of a group. So the group actually built a spreadsheet. I could be biased when I say this, but I think that I’ve seen several spreadsheets and I think that this is the most in depth spreadsheet out there. And like I said, I’ve seen a few of them. I haven’t seen all of them, so that might be a biased thought. But I would say, obviously we want to look at the comps, see what other comparable properties, similar vintage, similar area, what they’re renting for and what condition their units are in. So obviously if you see this property and it’s ’80s build, let’s say, but it isn’t renovated, let’s say, but you see other properties that are similar in ’80s vintage in the same area that have grander countertops, new flooring, new cabinets, paint, the whole nine, but they’re getting $200 more.
Well, we can obviously tell that this subject property is not achieving those rents because they’re not in the same condition, but we can also conclude that if we went in and did the same renovations, we can likely get that same rent bump, so that’s kind of what we look into. So the rent comps. We also want to make sure that we get quotes. Several, there’s a several, a checklist. So we want to make sure that we get quotes from our insurance company, because you can take a guess as to what insurance will be, but I think most insurance companies provide free soft quotes, which they can, they’re pretty accurate. So it doesn’t take them that long either. So you would want to get an insurance quote to see what you’ll be paying an insurance.
We usually like to either consult a tax consultant because taxes can be very tricky depending on what county and they change in every county. Some counties they freeze, some counties they reassess on sale. It’s different all over the place. So there’s not like one strategy. So a tax consultant is what we usually like to do, but you could call your tax office and just kind of ask them, a historically, how do they appraise and what their millage rates are, which is just kind of what they assess.
Ashley:
So you’re talking about like calling the assessor’s office?
Kenneth:
Yeah, exactly. And they can pretty much provide guidance, but we just like to be pretty accurate with our numbers.
Tony:
Kenneth, one follow up question. I’ve actually never heard of a tax consultant when it comes to identifying property taxes. Usually what we do is we just call the county of the city or whatever. Where do you find this tax consultant? Is there like a website where folks do this? Or is it like just, yeah. How do you find this person?
Kenneth:
Yeah, well, I was put in touch, so like I said, that’s the good thing about being in a group, I guess that kind of has already people that they’ve used in the past. But I’m sure you could just Google tax consultant or tax assessor consultant then I’m sure that there’s, there’s tons of companies out there that just specialize, especially in certain areas. You would just want to make sure that, obviously, that person that you’re consulting is familiar with the tax in that county because if they’re not, like I said, it can change in counties and in each state there can be tons of counties, so. Yeah.
Tony:
Ashley, have you ever used a tax consultant or do you typically just reach out to the county assessor’s office too?
Ashley:
Yeah, just the assessor’s office.
Kenneth:
Yeah.
Tony:
Yeah. Interesting. All right. Sorry, Kenneth, didn’t want to get you off track, but I just wanted to [inaudible 00:27:23].
Kenneth:
No worries.
Tony:
So continue.
Kenneth:
And the reason we do that is, well, yes, to get a better accurate representation as to what the property taxes will be. Because if you’re in this, whenever single family, obviously you’re holding for long-term, but in the value on a multi-family property is what it produces an income. So if you’re incorrect about your numbers, that can negatively affect or positively affect your valuation. So we just want to make sure we’re as accurate. And also once you hire one, they can also try to pretty much appeal the assessment. So that’s kind of usually you use a tax consultant to appeal or go to the county and just appeal on your values so that they can lower your taxes. But yeah, so I guess the next thing on the list, we like to consult our local property management company.
So although we are, I would say, experts in the areas that we’re investing in, no one knows that area better than usually our property management companies. So we usually like to build relationships with property management companies that are in those areas that we’re investing in so that when we find an opportunity, we can go to them and they could potentially, they can provide us a budget for expenses, what similar properties of similar vintages and in this similar area are running at. For example, what they’re spending on marketing or payroll, things like that, because they know that market better than most people because they usually manage lots of units in that area. And also what they think based on the comps, what they think rents could be pushed to and what renovations you would need in order to achieve those rents. So I think, and we rely heavily on our property management company.
Tony:
And let me ask just one clarifying question, Kenneth. You’re running through a lot of really, I think, beneficial things to do, but are you doing all of this before or after submitting your initial offer to the seller, to the broker?
Kenneth:
Yeah. So this is all before we submit an offer. And the reason why is because in this business, it’s all about reputation and people, there’s a term called retrading, which basically means you go back and try to ask for a discount. And if you do that without, obviously, if you go in and do due diligence and find that there’s foundation issues and no one knew, or termite damage, for example, no one even knew that there was termite damage, then you need a discount because you need to repair that. But if it’s just because you didn’t do your numbers correctly, you’ll get a negative connotation to your name and it’s not really, it’s very frowned upon in this space.
Tony:
Gotcha.
Kenneth:
So we just want to make sure we have all of our ducks in a row, so that when we submit an offer, we don’t have to go back and try to get a discount for something we should have already kind of looked at.
Ashley:
Kenneth, how long does this initial checklist for underwriting take you? To get an insurance quote, to talk with your property management company. What’s an average timeframe? So if you think of an investor right now, or the past year, not even right now, going after single family or duplex, especially on the MLS, it’s like you have to analyze that deal that day. So what is kind of the timeframe look like for multi-family doing the underwriting?
Kenneth:
Yeah. And this depends, obviously, on various factors. Unfortunately, you have to depend on other people who are also very busy and are probably receiving tons of deals, especially now. But I would say, usually, I mean the initial underwriting, which I do, I guesstimate most of these numbers before I go to insurance, property management or a tax consultant. So I try to find those numbers for myself and just see, usually because I know the area and the market and things like that, usually they’re not too far off.
So if they don’t even pass that first, I don’t even go to that step. But once I do send it out to them, I’d say it takes anywhere from four days to a week for them to get back. Usually the, it depends on how much time we have, but on these deals it’s not like you’re buying, it’s usually pretty hefty of a price, so usually you have a lot of time to submit an offer. So I’d say usually they’re on market for at least a few, I’d say minimum two weeks, most of the time, almost like a month. So you have plenty of time.
Ashley:
So when this property, the underwriting goes through and you’re like, yes, we want to make an offer. Are you putting together a full contract? Are you submitting a letter of intent, an LOI? What’s kind of the next step after that?
Kenneth:
Yeah. So once you figure out like, okay, I like the area, I like the price, this makes sense for us, the returns are great. You then draft up a letter of intent, which just, it’s a non-binding agreement pretty much, just stating that this is the price, these are the terms. So usually not, more so now there’s less pushback, but usually on multi-family you’re putting hard money, day one, how much you’re going to be putting, there’s a certain period for due diligence, which is pretty standard in single family as well. And then how long you’ll take to close. So I think standard 60 days here in multi-family. So you kind of draft up the price, the terms and it’s a non-binding agreement, so it’s just showing your intent, but people pretty much respect that heavily in apartments.
Ashley:
So you guys can Google an LOI, a letter of intent, online and find a million different samples of what it looks like. And it’s very common in the commercial real estate world for a letter of intent to be submitted to a seller before you actually have a full contract drafted. So kind of what are some key elements of your letter of intent that you think everybody should use in theirs?
Kenneth:
Yeah. So like you said, you can find a ton of them. So obviously, the date, who it’s going to, the purchase price, the address, well, at least the name of the property, if you want the address but I just usually put the name, the purchase price, how much earnest money or hard money, if you want to put that, how long you’ll have to close, how long you’ll have for due diligence, and whether or not you’ll have financing contingency. Everything else can pretty much be spelled out in the contract. Which, I mean, the contracts are usually really long, so you don’t necessarily have to go into all of that.
Ashley:
So after you’ve submitted the LOI and put that together, what does the due diligent look like? Are you driving comps? Are you going to the actual property? Are you sending people there? What’s that the due diligence process look like for you?
Kenneth:
Yes. So, and I meant to say it, so before submitting an LOI, usually we tour the property. Now there’s some companies that don’t tour, they don’t even want to spend their time looking at it if they’re not even going to win the deal. And it really just depends on what you want to do. I personally think it’s just best to look at it, that way you’re not wasting your time or the other’s, seller’s or broker’s time.
So usually we like to get on site. We like to tour the property. Usually they’ll show you a renovated unit and then a classic unit, and then you’ll get to walk around. You’ll get to look at the amenities. You’ll get, I mean, you could drive the area. So usually we like to drive the area. We like to take a look at the comps that have sold, so sales comps. We like to take a look at rent comps. If we have the ability, we like to potentially schedule tours and secret shop, pretty much, rent comps to see kind of what their units are with our own eyes. Because you can look at it on the internet, but it looks a lot different, usually, in person. So we like to do all of that before submitting the LOI, and then yes, we submit the LOI.
Ashley:
And, of course, when you ask to see a unit as a potential buyer, they’re going to show you the best unit there is.
Kenneth:
Yes, exactly. Yeah.
Ashley:
So, you do the whole checklist and then once you’re like, okay, we like this deal, then you kind of save the actual visiting of the property last and then you’re going and writing your offer?
Kenneth:
Yes. That is usually the very last thing that we do.
Tony:
One follow up question on that, Kenneth. Where do you live in relation to the markets you’re investing in? Because I can imagine for some folks, say you live in California but you’re looking at the Dallas or the Midwest somewhere, it could get expensive trying to find all those properties before actually submitting your LOI. So how do you guys balance that, not wasting too much money up front if the deal doesn’t go anywhere?
Kenneth:
Yeah. And that’s a great question. So we do have properties that are a little away. So we’re in North Carolina and we own properties in Florida. We try to look for deals that are in North Carolina and Georgia, which are either driving distance or just a quick flight away. I would say or recommend that you look in your backyard, unless you’re in a market that you wouldn’t want to be investing in, which is up to your own preferences, right?
But I think the best would be to start just because if you, whenever you look at a map, usually in a place that you live, you can pretty quickly say, oh, I know where that’s at, that’s near this store or near this area and this area’s good, or I don’t know if I want to be in that area. So you kind of already understand that because I’m sure you’ve been driving to work. You’ve either been taking your dog to the veterinarian. You kind of already know the area. So I think that, that would be the best thing to kind of start off with in your backyard.
Tony:
Cool.
Ashley:
The last little piece here that I don’t think we touched on is when you are going to, you’re underwriting the deal, who are you talking to about financing the deals to get that, to find out how much you’re going to have to leverage the deal for, how much money you think you can raise, who’s going to sign for the loan, things like that? Are there key people you discuss that with before you go into underwriting?
Kenneth:
Yes. So as far as financing, so when we do underwrite, we do send it as well to, we use a mortgage broker that all of our group pretty much uses. But you can, I mean, the amount of debt that’s out there, as long as you qualify obviously, is actually insane. So especially with multi-family, they want to lend on these assets as long as it’s a good asset and you can prove that there is value potential. So I would say, you can pretty much Google any mortgage broker, go on LinkedIn and you can find them there. They’re all over the place. Fortunately for us, we have someone that we use and we also have someone that has the capability to, at least for all the deals we’re doing, they have the capability to sign on the loan as a key principle.
But like I said, it really just depends on your network of people. So if you know someone that’s pretty high network or net worth, I mean, and they’ve already told you that they’re willing to sign on loans, you can kind of keep that in mind. They’ll obvious, the mortgage broker will ask for balance sheets and liquidity state proof, things like that and also schedule real estate owned and things like that. But you can kind of have that in line before you go out and submit an offer, I’d say.
Tony:
Well, Kenneth, you’ve done a great job of walking us through kind of what that checklist looks like. But I just want to recap for the listeners to kind of package it up for them. So first you underwrite the deal, right? Then you’re getting your quotes, your insurance, your mortgage, your property management, your taxes. If all those things check out, then you’re actually trying to get boots on the ground, go walk the property, drive the comps. And then if everything checks out, you move on actually submitting your LOI. Does that sound about right?
Kenneth:
Yes. That’s a hundred percent correct.
Tony:
Okay. Awesome, man. So there’s a few pieces there that I want to spend a little bit more time drilling into because I think this is where most newer investors might find some challenges, but first is actually meeting with and networking with brokers. So early in my investing career, we had aspiration of also going into multi-family syndication. We had a really difficult time getting decent deals from brokers, right? Most brokers, they kind of have their Rolodex of syndicators that they get their deals to first, and if those syndicators don’t want it, then they’ll kind of start sharing it with other people, right? Which usually means you’re getting leftovers.
Kenneth:
Yeah.
Tony:
So how can a new investor, I guess, position themselves when talking to a broker to not get the deals that no one else wanted?
Kenneth:
Yeah, absolutely. So first of all, I mean, I think getting to know someone is the best way, honestly, and in order to do that, you need to see them in person, whether that’s you tell them that you’re going to be in the area, or if you live there, telling them, asking them if they want to go grab dinner or not dinner, usually lunch, I do. So go grab lunch or a coffee or something. That way you can get face to face, or if you’re already on their list and you go, usually you can go to their website, sign up for their email blast and they send you deals. So if they send you a deal and it’s on market, you can usually schedule a tour with them and go out and just tour with them, get to know them. And that way they kind of understand, they see you, they see that you’re serious.
And you just get in front of them because then you get to know them. You talk to them, you kind of learn about their story. They kind of learn about you. They see that you’re real, because most people they’ve never met before. So regardless, although you probably won’t be the number one person they think of, you will very easily differentiate yourself to the thousands of people that they have on their list, just because they have already seen you and they’ve gotten to speak to you, and you can get to know someone pretty easily when you speak with them in person because energy’s everything.
Ashley:
Let me ask you this. What’s a piece of advice you have where someone can get in front of somebody, like a really busy person, where if you ask them to coffee, you ask them to dinner, to buy them dinner, if you want to just stop into their office and talk, that, that’s not going to happen because they’re too busy for that. Even if it is somebody who wants your business, if you’re not somebody they know already has a track record or can definitely close a deal, it’s going to be a lot harder to get in front of someone. So do you have an advice of how you can stick out in their mind at all? Is it sending them a gift every single week or nonstop phone calls, sending letter, love letters.
Kenneth:
Yeah.
Ashley:
I don’t know. What would your advice be on that?
Kenneth:
That’s a great question. So two things, if you’re speaking about brokers, in general, in order to, I guess, get brokers to like you, I would say just really getting in front of them. I mean, like I said, whether or not you can, sometimes they give opportunities. If you constantly go on tours, you constantly underway and then you answer them and tell them, hey, this deal does not work because of X, I don’t like the area or the returns are not there or just kind of explain why the deal doesn’t work for you. They’ll start to kind of understand what you’re looking for and they understand you’re serious, but if they send you something and then you just never answer them, they won’t ever really understand kind of why the deal didn’t work. So you’re not really helping them.
Now, if you’re just talking about, I’d say, I guess, valuable people or people that are high-net-worth or just people that don’t have much time, I’d say the number one way is to start a podcast. We, on our podcast, we’ve been able to bring a ton of people. We’ve been able to ask them good questions, but really sometimes questions that we have ourselves. And most people, if you kind of invite them to your podcast, most of the time, they would love to get on a podcast because it’s more exposure for them. And they’re not going to just ask you, how many downloads do you have or anything like that, anything crazy. And over time, you’ll have great conversations with a lot of people. Usually you’ll get their email, at least. Sometimes you can even get their phone number on their signup sheet. And yeah, you can stay in contact or email them once in a while.
Tony:
That’s a great tip, Kenneth, about starting your own podcast. And I’ve shared the story many times, but when I started my first podcast, that was a big part of my motivation as well. It was just like meet as many people as I could. And I was putting out three episodes a week when I first started my podcast and I was doing the math. I was like three people a week at 52 weeks a year, that’s like over a 150 people I’m going to get to meet and talk with, as I’m doing this podcast. And I love that. But one follow up question. How many deals would you say you have to look at? How many deals will a broker send you before you find one that’s actually worth something? Is it one good deal for every five? Is it one good deal for every 100? Where do you kind of fall in that spectrum?
Kenneth:
Yeah. I would say, so I guess, and I think maybe things have changed now. I think the market is turning into a buyer’s market. So we kind of have more say. But as of recently, usually it’s about every 100 deals, 10 of them will make sense for you or fit your, I guess, criteria or something or get… Yeah, your criteria, I mean. And then out of those 10, you’ll probably submit those 10 offers, and out of those 10 you’ll potentially get one or two accepted. And then out of those one or two, you’ll close on one. So two accepted you’ll close on one. So that’s kind of like the metric, I guess. So we aim to underwrite a 100 deals. I wouldn’t say as fast as possible, but we kind of know once we’re getting closer to a 100, it just seems to work out somehow.
Ashley:
And that shows the importance of keeping track too. So you actually know what that metric is within your business.
Kenneth:
Absolutely. Yeah. Organization is key, for sure.
Ashley:
Yeah. Kenneth, this has been all great advice and I want to keep it going by moving on to our Rookie Request Line. As a listener, you can call in at any time to 1-888-5-ROOKIE, and leave us a voicemail. Tony and I will get it, and we may pick it to be played on our show for a guest. So this week’s question is from Nick Bowers from Colorado Springs. I have a question regarding my first investment. I’m investing out of state. Now I’m torn between cash flow or appreciation. I’m worried that I can’t do a cash-out refi on multi-family and grow my portfolio. Which avenue do you guys suggest? Thank you for your time and I love the show. So what would be your advice there, Kenneth?
Kenneth:
Yeah, so especially in times like now, I would say obviously you want to be in a market in which there’s potential for appreciation, but I would say that the number one thing that you should not compromise is cash flow. As long as the property is cash flowing, it doesn’t matter what the value is. You’re still making money. You can still service the debt. You can still service all of the expenses and you can keep it. The worst thing to happen in real estate is not to be able to make your payments or have negative cash flow because that’s kind of what can hurt you if there is a downturn. Evaluations may fluctuate, but if your property’s just producing income and usually rents stay steady through recessions, which is pretty historical, you will be fine. So I would say cash flow for sure. But obviously, you would like to look into a market that has potential for some upside.
Tony:
Yeah. Kenneth, that’s a great point. And honestly, this question about cash flow versus appreciation comes up a lot and, honestly, I think it comes down to the unique person situation. If you’re trying to replace your W-2 income as fast as you possibly can, appreciation isn’t going to help you a whole heck of a lot, right? You need cash flow. But if you’re just trying to invest as a way to help supplement your retirement, then yeah, maybe cash flow isn’t as important today and you’re more concerned about appreciation. So whenever someone asks this question about appreciation versus cash flow, I think it’s a deeply personal question that’s really more aligned with what that person’s goals are when it comes to real estate investing. For me, cash flow is always more important because I knew I needed the money coming in to replace my W-2 income. So I think hopefully that helps point you in the right direction.
Kenneth:
Yeah. Correct.
Tony:
Kenneth, we want to take you onto our rookie exam. So I know you answered this back when you were on with your brothers, but maybe we can tailor your answers today to be a little bit more about the acquisition side of the business you’re focused on. So if you’re ready, we’ll take you to the rookie exam.
Kenneth:
Awesome. Let’s do it.
Tony:
All right. So question number one. What’s one actionable thing people should do after listening to this episode?
Kenneth:
Yes. So I mean, whether you learn how to underwrite, and underwriting can be pretty, it can get complex, but I would say it can be very simple as well. Just learn how to underwrite on the back of the napkin. And or if you have, if you can find an analyzer that you want to use or a model that you want to use, just underwrite deals, whether or not you’re going to go out and look at them or you don’t have to go through all the way, but just understanding why the numbers are the way they are and what makes them that way. I think just looking at deals and learning how to underwrite deals is just the most important thing.
Ashley:
And if you need something to use to analyze a deal, you can go to biggerpockets.com and use the calculators on there to analyze a deal.
Kenneth:
Exactly.
Ashley:
You get five times free and then, but if you’re a pro member it’s unlimited, so.
Kenneth:
There you go.
Ashley:
A really great, easy way to get started because there’s a little link next to every expense, every income input, every input has a little blue link and you click on that and it tells you what it is and where to get that information from. So really great for beginners and experienced investors too. Hey, Kenneth, one question real quick. When you are talking to a mortgage broker, you’re talking to investors, you have some kind of report or you’re showing your calculator, your spreadsheet to these people, that’s super beneficial, right? To have something to kind of put in front of them, instead of just saying, hey, this deal is going to cash flow X amount without showing the proof. Yeah.
Kenneth:
Yeah, exactly. So you obviously build a pro forma, which is just looking into the future, what you think you’ll be spending on each item like payroll, what taxes will be, what marketing is going to be. Just going through those line items and what you think you’ll spend, and then also where you think income will be based on where you think you can push rents. So kind of showing them that spreadsheet and those numbers kind of helps them put together an image or the vision as what you’re seeing.
Ashley:
Yeah, and the Bigger Pockets calculator reports have, once you analyze it, you can just print off a report, little pretty chart, all your numbers on it to show to people. So mortgage brokers or investors on the deal.
Kenneth:
Awesome. Yeah.
Ashley:
Okay. So our next question for you, Kenneth, is as far as your role in marketing acquisitions, what’s one tool, software app, or system in your business that you use?
Kenneth:
I would say CoStar, but that might be a little pricey. Really, I mean, honestly, you can use apartments.com. I sometimes go to apartments.com. I mean, maybe it’s not really like software, but apartments.com, I mean, that’s literally, I’d say, a majority of the time that’s where most apartments market their rent and they put pictures there. They try to make their property look as beautiful as possible and try to market. Because whenever you search up, if you’re moving to a new place and you search up apartments for wherever, apartments.com does their own marketing, so likely their ad or their website is going to be the first link up in the top. So most apartments and us included, we use apartments.com and we market on apartments.com. So I use that to look up rent comp. So I find the subject property and then I’ll look at other properties in the area and kind of see what their finishes are, what their renovations look like, and then what they’re renting their units out for.
Tony:
Awesome brother. So last question for you, where do you plan on being in five years?
Kenneth:
Five years. Oh, wow. That’s a long time from now. So we have, I’d say, some pretty audacious goals. We’ve come across people that have grown their companies pretty quickly. So I’d say one year, five years, I’d say half a billion of assets under management and on the acquisition side, so not as a co-sponsor, pretty much as acquisitions, at least. So yeah, I’d say that, that’s our goal. So whether, and I would say units, but wherever, depending on the market, it could be a 100,000 per unit or a 130,000 per unit. So I think that kind of varies. So yeah, I’d say, closer to a half a billion in management.
Tony:
I love that Kenneth. So our goal in our business is to get to 1 billion in 10 years. So half a billion in five years is almost the same thing, man. So I love that.
Kenneth:
That’s our tenure, so that I just had to do, yeah.
Tony:
You did cut it in half, right?
Kenneth:
Yeah.
Tony:
I love it, man. All right, cool. So let me highlight this week’s rookie rockstar. This is Jason V from Wilmington, North Carolina. I’ve actually never been there, but we’re actually looking at some properties in the North Carolina area. So I might have to pick your brain Kenneth. But Jason says that he’s been investing for two years now and wants hear his most recent success story, but he closed in an eightplex last week. And as part of this deal, he was able to complete a 1031 exchange and got his first commercial property, first commercial loan.
So he believes that the fair market value with the current rent is around $700,000. He plans to do a cash-out refi in six to 12 months and hopefully pull out $200,000. And he’s believing that the value at that time of the property would be about a million bucks, which is amazing, right? To increase the value in such a short period of time. So Jason, congratulations to you, excited to see you get that first commercial deal done. And hopefully we’ll get you on the show soon, once this deal wraps up. So you can tell us all about it.
Kenneth:
Yeah. Jason, congrats. Wilmington is like two and a half, I’m in Durham, North Carolina, so that’s a two and a half hour drive from us. My brother actually studied at UNC Wilmington before dropping out and pursuing real estate full-time. But congrats, that’s awesome. Hit us up, so we can link.
Ashley:
Yeah. Great job, Jason. Excited to see what you do with the deal. Well, Kenneth, thank you so much for joining us again, back on the podcast. Can you tell everyone where they can reach out to you and find out some more information about you?
Kenneth:
Yes, absolutely. So you guys can find us on pretty much at @donisbrothers and that’s Donis, D-O-N as in Nancy, I-S and then brothers on YouTube, Instagram, Twitter, where else? Oh, TikTok. Pretty much every platform.
Tony:
Everywhere.
Kenneth:
Yeah, pretty much everywhere. And then our website is www.donisinvestmentgroup.com, if you guys want to learn more about investing in multi-family and why that might be beneficial for you guys. Yeah, you guys should check us out.
Ashley:
Hey, well, thank you so much. We really enjoyed having you back. So make sure you guys go back and take a listen to the Donis brothers episode. So we had the first episode with all three of them, number 175. Jeffrey was on 193 and Kerwin was on 199. So yeah, thank you so much for joining us. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson. And we will be back with another episode.
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66 mortgage lenders, brokers make Inc. 5000 list
Nearly 70 mortgage lenders and brokers made it on the list of Inc. Magazine‘s 5,000 fastest-growing companies in the U.S. for 2022.
The companies are U.S.-based, privately held and independent as of Dec. 31, 2018. Additionally, all these businesses had a minimum revenue of $100,000 in 2018 and $2 million last year.
All the top five mortgage lenders debuted on the Inc. 5000 list for the first time. theLender, which offers government and conventional mortgages as well as non-QM products, saw a 20,489% three-year growth rate.
MortgageOne (no. 284) came in second place for top mortgage lenders, growing 1,952% in the past three years. Zap Mortgage (no.335), Trius Lending Partners (no. 372) and ASTAR Home Capital (no. 390) trailed with a four digit three-year average growth.
Trius Lending, a local direct and hard-money lender specializing in residential investment, attributed its rapid success to customizing to investors’ needs.
“The edge that we have as a local lender focusing on Maryland and the Mid-Atlantic is to meet with investors in person and closing loans more quickly than national lenders,” said Joshua Shein, partner at Trius Lending.
According to the firm, the core business at Trius Lending is residential rentals or properties for fix-and-flip. With about 35% of its customers being first-time real estate investors, Trius is hopeful to get repeat customers as it keeps its losses to a minimum, Shein added.
“We raise funds from outside investors and that’s how we fund these loans. Those investors and also ourselves (the partners) we want to be looking out for our loans and we believe that approach helps us to keep the losses to a minimum,” he said. According to the firm, Trius has more than 350 loans it holds and services.
Several of the top 10 HMDA lenders by volume were on the Inc. list. Freedom Mortgage, the seventh-largest HMDA lender, was ranked No. 4158, with average three-year growth of 112% Guaranteed Rate, the 10th-largest HMDA lender, ranked No. 1673, with growth of 372%.
Mortgage brokerages on the list included The Everest Equity Company (No. 2522) and Right Key Mortgage .
As with many lenders, technology was one of the main factors that propelled growth for these lenders, including LoanFlight Lending, a Florida lender that saw 420% growth.
The firm started building a cloud-based model for loan originations in 2017 as a back-up plan for when tornadoes hit, but when the pandemic hit, “having that “contingency plan paid off in a different way,” said Paul Blaylock, CEO at LoanFlight. LoanFlight funds loans with warehouse lines and bids the loans out to about 15 different bidders, including traditional banks, and nonbanks every day.
“We didn’t have branches all over the country, we had a consumer to direct-model in place before others,” said Blaylock. “Everything can be done except for closing. A lot of what we save, we pass to the customers.”
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