103 Why Does It Matter If A Fund Has A Debt Rather Than Just Equity?
In today’s episode of Active Wealth, Passive Income Show of Carolina Hard Money Bill, Wendy, and Jonathan will answer and discuss the following “ Ugly Questions”
1. Why does it matter if a fund has a debt rather than just equity?
2. What is the Fund Doing as a Fund? 3. How does bankruptcy, foreclosure, or forbearance affect my ability to qualify for a hard money loan?
Watch this video to learn about the answers to these pressing questions.
Bill Fairman (00:07):
Good afternoon, everyone. It’s Bill and Wendy with Carolina Capital Management. Welcome to our Passive Income, Active Wealth show. Don’t forget to like, share, ring the bell.
Wendy Sweet (00:23):
Subscribe, tell all your friends.
Bill Fairman (00:23):
Hit the bell, subscribe,
Wendy Sweet (00:26):
Gossip. Whatever it takes.
Bill Fairman (00:26):
We are lender in the Southeast. We do short term hard money loans. If you’re a borrower looking to borrow money, go to our website, CarolinaHardMoney.com and you can click on the apply now button. If you’re an investor looking for passive income or long-term growth passively, and then click on the investor tab,
Wendy Sweet (00:52):
You are so full of excitement, it’s just bursting out of you.
Bill Fairman (00:57):
Oh, come on. I’m using my FM voice.
Wendy Sweet (00:59):
We need to be excited. Christmas is coming, so I’m ready. I’ve got my holiday shirt on. Ready to go. He was making fun of me earlier.
Bill Fairman (01:08):
It’s coming too soon.
Wendy Sweet (01:12):
Bill Fairman (01:12):
It’s not even Thanksgiving yet.
Wendy Sweet (01:15):
I know but you know,
Bill Fairman (01:15):
Wendy Sweet (01:15):
I was going to wear this since July.
Bill Fairman (01:15):
We’ve had black Friday sales for the entire month.
Wendy Sweet (01:20):
That’s a long Friday. Isn’t it?
Bill Fairman (01:24):
Wendy Sweet (01:24):
Well, we’re on Ms. Combobulated. Anyway, you know, we we’ve had the plague and now we’re pretty much over it. And back in the swing of things, I’m really thrilled
Bill Fairman (01:34):
I’m back to my regular whiny self, done with my sick whiny self. Excuse me.
Wendy Sweet (01:42):
And Jonathan is stuck in traffic, right?
Bill Fairman (01:45):
Yeah. If you’re not around this area, we’ve had a lot of rain.
Wendy Sweet (01:49):
Series flashfloods everywhere.
Bill Fairman (01:52):
We’ve got alerts on our phones about life-threatening flash floods and poor Jonathan is on the other side of town trying to get across here and he has to go through water and accident. Hopefully they won’t have to be rescued
Wendy Sweet (02:07):
Well, he’s in a truck. So that should help a little bit, a very little bit, but yeah, it’s kind of spooky. There’s a lot of floods going on and some of our good friends that are our virtual assistants are dealing with typhoons four of ’em and.
Bill Fairman (02:22):
In the Philippines.
Wendy Sweet (02:22):
And what, a month? They’ve had four of them.
Bill Fairman (02:25):
Wendy Sweet (02:27):
Yeah. So that’s, we gotta pray for them.
Bill Fairman (02:29):
So pray for those folks. Get a lot of fast moving, rising water there.
Wendy Sweet (02:37):
Bill Fairman (02:39):
Yep. Climate change. Why are you laughing at me? Because you’re such in a fog today. It’s unusual for you.
Bill Fairman (02:51):
I went back to my bootcamp classes this week and I only made it halfway through the one on Monday.
Wendy Sweet (03:00):
Hey, but you made it. That’s awesome!
Bill Fairman (03:00):
And I made it completely through the one last night and, yeah, I’m a little discombobulated.
Wendy Sweet (03:07):
Yeah. You gotta skip slowly back into life.
Bill Fairman (03:07):
Wendy Sweet (03:10):
Bill Fairman (03:10):
Okay. That said, let’s talk about the breaking news breaking news.
Wendy Sweet (03:20):
Do you have any updated breaking news?
Bill Fairman (03:20):
Yes I do. And perhaps, And as I finished that, perhaps, our professional graphics will pop in,
Wendy Sweet (03:50):
That’s right. Yeah, Scott’s in work.
Bill Fairman (03:50):
Thank you, Scott. He’s not feeling well either.
Bill Fairman (03:53):
But it has nothing to do with the plague. I think he says he might have eaten something a little off.
Bill Fairman (03:59):
He’s got someting,
Wendy Sweet (03:59):
In CanCan, poor guy. He’s got a rough life.
Bill Fairman (04:03):
Yeah. He had some bad rabbit food for breakfast. So, new unemployment numbers, they expected to have 735 new unemployment. Turned out it was 709.
Wendy Sweet (04:21):
Oh, even better. Good.
Bill Fairman (04:21):
Beat expectations. And then our continuing jobless claims went from, and it was 6, 900,000 last time and it’s moved down to 6 million, 780 something.
Wendy Sweet (04:42):
Oh, good. It’s lowered too, excellent. Excellent.
Bill Fairman (04:42):
The economy is chugging along. The things that you have to worry about right now that you’ve got certain States that are starting to lock things down again.
Wendy Sweet (04:55):
Yeah. I think North Carolina’s one of them, right?
Bill Fairman (04:55):
And I’m sorry, I’m going to have to get on a soap box.
Wendy Sweet (05:02):
Get out there, Bill.
Bill Fairman (05:02):
All I keep hearing about is we’re going to follow the science, we’re going to find the science. What science tells you that anything spreads more after 10 o’clock at night and then before 10 o’clock at night?
Wendy Sweet (05:16):
I like that one.
Bill Fairman (05:16):
I gotta close my restaurant at 10 or my bar at 10, or my gym at 10, because the disease is more infectious after 10 o’clock at night.
Wendy Sweet (05:25):
Or how about the limited number of people that you can have in your home for Thanksgiving versus the amount that you can get together with on a funeral? You know, or, even the voting polls. Let’s talk about that. It was okay with people with symptoms to wear a mask and gloves to go vote.
Bill Fairman (05:45):
It’s one thing to say we suggest, or we would appreciate if you didn’t gather more than this many people in your home during the holidays to help the spread down. It’s another thing to say that I’m going to have the police in force no more than 10 people in your house. Yeah.
Wendy Sweet (06:05):
Well, I’ve heard most people say they’re not going to enforce it, but what I think
Bill Fairman (06:08):
The governor actually said he wants the.
Wendy Sweet (06:11):
Of North Carolina?
Bill Fairman (06:12):
No. The governor of New York.
Wendy Sweet (06:14):
Well, they’re crazy anyway,
Bill Fairman (06:16):
Said that he was going to have the police in force.
Wendy Sweet (06:20):
Yeah. That’s kind of insane. That’s really insane.
Bill Fairman (06:23):
Wasted time. How about enforce the laws for the actual criminals?
Wendy Sweet (06:29):
So I also heard that the survival rate for COVID is like 99 point something percent to begin with. And that’s pretty incredible. I heard that this morning.
Bill Fairman (06:46):
We are having more cases, but I think this thing is kind of blunting itself and at the same time they’ve got treatments and they understand it better. The, we still have to protect our vulnerable. Don’t get me wrong. This is a killer for people that have underlying conditions.
Wendy Sweet (07:02):
Yeah. We lost a cousin too in it, it’s heartbreaking.
Bill Fairman (07:04):
At the same time, you can’t just shut everything down. It’s not going to work people. Aren’t going to take it anymore. They’re already stir-crazy. You’re not going to make them go through this again. It’s just ridiculous. Just make sure you wash your hands on a regular basis, you know, where I’m asking you around folks,
Wendy Sweet (07:24):
Don’t touch what your brother touches. I have to blame you.
Bill Fairman (07:30):
Yeah. Of course you do.
Wendy Sweet (07:34):
Bill Fairman (07:34):
Now I forgot what I was going to say about more of the economy. Oh, housing market is really a bright spot.
Wendy Sweet (07:44):
Yes it is.
Bill Fairman (07:44):
And it’s going to continue to be a bright spot. Interest rates are going to remain low, especially if they keep shutting down parts of the economy. That said, people want, if they’re going to be stuck in their homes, they’re going to want a better home. So anything that has to do with housing, new construction, rehabs, existing homes, people are buying stuff from Lowe’s and home Depot. They’re buying furniture, they’re extending their living areas into the backyard. So you’re gonna see a lot of,
Wendy Sweet (08:21):
So the outdoor companies will do well.
Bill Fairman (08:23):
Yeah. And maybe even those folks that can do those three seasons room. Sunrooms, that type of thing that you just, if you’re going to be stuck there, you’re going to want to be more comfortable. And if you’re going to vacation at home, maybe even the pool companies start picking up. So anything having to do with the housing market is going to be a pretty good bet for point sometime. Don’t you think?
Wendy Sweet (08:45):
Yeah, I agree. And I’m amazed too, at the number of people that are moving out of certain States into the Southeast .I have several houses that we’re doing a little few fix and flip on and I’m amazed at the people that are looking at the houses that have put their homes on the market, once coming from Washington, DC, another one New Jersey and another one from New York. And they’ve put their houses on the market. They have cash to buy our houses. Now these houses are selling in the 100 range to 150 range, but I’m just amazed at the amount of people that are coming down for the same reason, because they’re not happy with the way their States are treating things so
Bill Fairman (09:34):
Well, you know, I’ve been keeping my eye on Southwest Florida. I like that area. It’s still very affordable.
Wendy Sweet (09:39):
Yeah, he’s looking so. And he bought that one area.
Bill Fairman (09:42):
But what I’ve noticed over the past few months is that the good deals that were there before are not there any longer.
Wendy Sweet (09:48):
It gets more expensive.
Bill Fairman (09:48):
And if there is a good deal that pops up, they’re getting multiple offers and it’s ended up raising the sales price because you can follow this. If a house goes under contract and then sales, you see, you can see how much it’s sold for versus what they were asking for when he went under contract.
Wendy Sweet (10:07):
And it’s happened everywhere.
Bill Fairman (10:07):
And now those prices are starting to move up or the actual closed price is moving up and they’re doing this because they’re low tax areas. They didn’t have an income tax and they’re fleeing these areas that are shutting down and tanks and the crap out of you.
Wendy Sweet (10:32):
But if you are in real estate in these markets that are really, really doing well, and there’s several of them, there’s several of them. Don’t go crazy thinking that all the values are gonna all expand. And, you know, I can go into any price point and do this, and you still need to be cautious with what you’re doing. Be smart, stay within your formulas. Don’t do anything you wouldn’t normally do because we just don’t know what’s going to happen. There are so many variables going on in the market with, you know, and we can’t even hop on the election. That’s a whole another thing. That’s just an unknown at this point, how things are going to go, what’s the cabinet going to look, you know, all the different things that are happening there. So we need to be smart about what we’re doing
Bill Fairman (11:30):
That said if you’re in, if you’re a stock market person. Some of the stocks that you might want to think about are, you know, home Depot, Wayfair, another good one is Dr. Horton, Dr. Horton is a builder of affordable homes and that’s always going to be a sweet spot. If you’re buying stocks, to me, you buy the ones that, and again, it depends on, everybody’s different in their investing. I’m looking at dividend paying stocks that aren’t utilities, because they’re never going to grow. They’re going to pay dividends and it’s, you know, it’s pretty steady, but it’s still better than buying bonds, but Chevron, for example they’re an energy stock that is a petroleum company. And why would you say buy a Chevron when you know, oil is at $41 a barrel? Well, they’re paying a 7% dividend. That’s important. That’s a pretty good return and they’ve been paying dividends for 138 years.
Wendy Sweet (12:53):
Yeah. That’s a little solid.
Bill Fairman (12:53):
So, you know, don’t be afraid to look at the stocks that you would not think would be doing well. But if they’re paying dividends, you’ve got to add that in there.
Wendy Sweet (13:04):
Yeah. But we’re not stockbrokers and we don’t pretend to be we don’t play.
Bill Fairman (13:08):
And I have no money in the stock market.
Wendy Sweet (13:10):
Yeah. So take all your advice from him.
Bill Fairman (13:11):
Everything that I have is in real estate, because I understand it better.
Wendy Sweet (13:17):
Yes, absolutely. Smart way to go.
Bill Fairman (13:22):
Jonathan Davis (13:22):
Wendy Sweet (13:22):
And he made it
Bill Fairman (13:23):
Did you have to wear your water wings?
Jonathan Davis (13:26):
It took a little over two hours to get from Concord to Rocky Hill.
Wendy Sweet (13:31):
Wow. That’s insane.
Jonathan Davis (13:33):
Yeah, it is.
Wendy Sweet (13:33):
That’s more level.
Jonathan Davis (13:36):
Yeah, there was a stretch of 85 that was a underwater. And then there was, you know, a couple accidents along the way. So.
Wendy Sweet (13:45):
Bill Fairman (13:46):
Shocked that people would run into one another and with a highway full of water,
Wendy Sweet (13:51):
Well, I don’t understand when it rains, everybody like puts on a stupid hat before they start driving for some reason.
Bill Fairman (13:58):
Okay. Here’s another soap box of mine. If you’re a driver in Rock Hill, you already have your stupid.
Wendy Sweet (14:04):
Oh that’s not true. We have no traffic in Rock Hill, we’re great. I should say that other people will move here.
Bill Fairman (14:10):
I do have to say, by the way, Scott, Alison made a comment about, how impressed she was with our breaking news video.
Wendy Sweet (14:19):
Yeah. We worked hard on that.
Bill Fairman (14:24):
Wendy Sweet (14:24):
Kudos to out guy on that, for sure.
Bill Fairman (14:27):
So we hadn’t started our questions yet. We just finished up with our breaking news. So Scott it’s time for another graphic it’s now time to do, today’s ugly question. So why does it matter if the fund has debt rather than equity?
Wendy Sweet (15:04):
I don’t know!
Bill Fairman (15:07):
If you’re a fund investor, if you look at a fund,
Wendy Sweet (15:08):
Well, first of all, it talks about the different between debt and equity. Okay, see, I’ll tell him where to begin. I wanna talk about this thing.
Bill Fairman (15:10):
Thank you. If you look at a fund, sometimes they’re only debt and sometimes they’re only equity. What’s the difference? Well, that means you’re lending the fund money and you get a particular guaranteed rate of return because it’s like a CD. You’re lending the fund money over a period of time. Now that in some cases, and it depends on the way the thing is set up. If you lent the fund $50,000.
Wendy Sweet (15:46):
Like me as an investor that wants to invest my money into the fund. That’s what you mean?
Bill Fairman (15:51):
Wendy Sweet (15:51):
Bill Fairman (15:52):
If you lent the fund $50,000, you may get a lower rate of return than if you lend the fund a hundred thousand dollars, so they may have what’s called a capital stack. The person that puts in the most money gets the better rate of return. And then you can also segment that out on a period of time. So if I’m lending the money for two years, I may get a lower rate of return than I would if I put my money in for five. Does that make sense? So go ahead.
Jonathan Davis (16:29):
When I read that question, I read a little bit differently.
Bill Fairman (16:33):
Well, I’m going to get into that too.
Jonathan Davis (16:36):
Wendy Sweet (16:39):
Go ahead and finish the thought, Jonathan. Finish the thought.
Jonathan Davis (16:39):
When you go into a fund, even if it’s a debt fund as a member, you are an equity owner. So, you know, you. That is the equity piece, but if a fund takes on debt, then that stacks on top of your equity ownership, which creates a greater liability beyond just what the fund owes to you as an equity owner. But that’s where I would go with it. I’m sure Bill is going right there too.
Bill Fairman (17:06):
So let’s talk about the equity side of things. So what you’re doing on an equity side is that you’re not getting anything guaranteed. You’re getting a piece of the profit that the fund makes. So typically, you’re going to get a higher rate of return, but it’s not going to be guaranteed that rate of return
Jonathan Davis (17:29):
And when you do that, you don’t always get a pref quarterly or monthly. A lot of times, if you’re on the equity piece, you’re waiting years before you get any return.
Bill Fairman (17:39):
Yeah. And it depends on the fund that you’re in. If you’re in a fund that essentially is a value add on properties. So you’re the fund is buying, we’ll just say a self storage that is only 45% occupied and needs a lot of work. Well, the fund’s job is to buy that at a big discount today, fix it up, get it, tenanted up to whatever the market rate is and then that’s going to bring value. So while you may not even get any income along the way until it gets to a certain point and then it starts paying income and then your bonus at the end is one of two things. It’s either the sale of the property and you get a percentage of the profit, or it could be refinancing it and getting a certain percentage of what the new value is. And you’re getting, if it’s a refinance, you’re actually in a better position because you’re not going to have any capital gains tax to deal with. If you get that many of the refinance would be tax-free. If they sell it, then you’re going to be subject to capital gains. Not to mention if you’re taking a depreciation over time. When you sell something at a profit that you’ve been depreciating, you have to pay that depreciation back. Once you’ve paid that appreciation back, then you’ve got to pay the capital gains on what’s left over.
Wendy Sweet (19:30):
Okay. So all this for me is clear as mud, and I’m really wondering what the debt is in a fund. So you’ve got debt, like when you invest in a fund, you could be lending money to that fund, but there’s also another way to look at debt in a fund. And is that, does the fund have debt against it?
Bill Fairman (19:57):
Well, that’s what Jonathan just covered. So the debt would be, let’s say I had 15 million in a fund, but I wanted a 30 million of dollars to lend with. Well, you could. And, you know, for the sake of this conversation, I’m trying to keep it easy math. So you could find a credit facility and it’s similar to, if you got a home equity line of credit based on the value of your home in this case, you’re putting up the $15 million worth of assets that you have in that fund. So if it’s a lending fund, for example, we have $15 million worth of loans that are out, and we are holding, you know, deeds of trust or mortgages on those properties. We’re essentially putting up that collateral for the next 15 million.
Wendy Sweet (21:00):
So he gets paid first.
Bill Fairman (21:01):
Hang on. Why would you do that? Well, there’s a couple of reasons you would do that is that you are probably going to be borrowing the money at, you know, let’s say four or 5%, and you’re paying, you know, seven, eight, 9% to your investors, you’re getting the money cheaper. At the same time, you know, you’re going to make more money in volume now that the investors are getting an advantage because the money’s cheaper, that means there’s more profit so they’re still benefiting. The downside to having that on a fund is that if any of you are around in 2008 and had a home equity line of credit and found one day that they didn’t cut your line of credit off,
Wendy Sweet (21:55):
That’s right. Oh, we want all our money back please.
Bill Fairman (21:56):
The same thing happens with credit facilities. You have to renew these things. Right, Jonathan?
Jonathan Davis (22:02):
Yeah. And I mean, you’ve even bringing it home to right now in the last year, people who leverage their funds and, you know, the people who, you know, the facilities that they leveraged them with called those lines do because of a global pandemic. Well, who does the fund? You know, who is it obligated to pay first? The line. So, you know, while there is, you know, there are advantages of leveraged funds, you know, one is, I mean, for the investors in the fund, you can make a higher return on the money that you invested in. Absolutely. For the managers of the fund, they can make a higher management fee because they have more assets money under management. So, you know, both can make more, you know, but the downside, and I think Bill and Wendy, and even, I, you know, we all share this same philosophy, the downside outweighs the upside for us and how we choose to run things.
Wendy Sweet (23:14):
That’s a good point.
Bill Fairman (23:15):
And we’ve been around the block a few times and we’ve seen others. and that’s one of, this is wisdom.
Wendy Sweet (23:24):
And we have it!
Jonathan Davis (23:24):
We learned it
Bill Fairman (23:24):
I’m saying this is wisdom because we learned it from watching others. It didn’t happen to us, but, you know, you can find yourself as an investor being stuck in a fund that let’s say worst case scenario. Here’s the worst case scenario. All of our loans go bad because the market has changed and no one can pay their bills anymore. If you have no debt on the fund, that’s not awful. It’s not great. It’s not awful because you can now take those homes, finish them up and rent them out and get a decent rate of return. The problem is if you have debt on your fund and you do that, where does all the money go that you’re receiving? It goes to the creditor or the credit facility, not the investors because they continue to get the income until that line is paid off and the only way you’re going to pay that line off is to sell some properties in order to pay it off and if you’re selling the properties at a loss to do so, then that’s also a detriment to the value of the fund. So that’s why we prefer not to carry any debt. We like it organically and to be able to control it, because, you know, as soon as, and I add this back in with the stock market, but institutional investors, when there are some headwinds, they can pull the rug out from under you and we would rather be in a position that we choose our own destiny.
Jonathan Davis (25:21):
Right. And, you know, the thing is like, is it easier to go out there and leverage your fund and create more assets under management so that, you know, and your investors can make more money and you can’t as a fund manager? Absolutely. It’s way easier to do that. Then the alternative, which the, you know, the alternative. Come on, I’ve got to,
Wendy Sweet (25:41):
Yeah. I’m getting that,
Bill Fairman (25:46):
Me too. They’re floods.
Bill Fairman (25:46):
We go some flood flares from flood warning’s here.
Jonathan Davis (25:48):
Yeah. The alternative to going out and leveraging your fund is to grow it organically and wait and be patient or to sell loans and recapitalize that way. And again, Wendy, Bill and my philosophy is we want to do it slow and right. Slow and correctly. So, you know, would we like to make more money? Sure. We would, everyone would like to make more money, but we don’t want to make more money in the short term for the potential of a big loss to our investors and ourselves.
Wendy Sweet (26:27):
That’s right. We don’t want to build our house on sand. We want to build it on rock. We want to make sure that our seeds take root deeply so that when the storms come, we’re not getting blown over, right? No. It’s Biblical! It is. It’s absolutely Biblical. It is written, that’s the way it should work.
Bill Fairman (26:51):
And now it’s been spoken and.
Wendy Sweet (26:53):
we leave. It was spoke a long time for us.
Jonathan Davis (26:56):[Inaudible].
Wendy Sweet (26:56):
Yeah, that’s right. I’m going down that path. That’s the one I trust. It just certainly makes us all feel a lot better when we feel that way. And, you know, it’s hard when we see other funds that are, you know, producing a lot higher return.
Bill Fairman (27:16):
Bigger and flashier.
Jonathan Davis (27:18):
You know, staff manager out there driving Lamborghini’s and we’re over here purring around with our little Toyota. what
Bill Fairman (27:28):
Yeah. As an investor, you should be happy to know that I drive a Volkswagen facade.
Wendy Sweet (27:34):
It’s nice. His radio’s incredible.
Bill Fairman (27:38):
For the important stuff, I gotta get serious.
Wendy Sweet (27:38):
The sound system’s awesome. But you know, it’s just, you know, we sleep easily at night, right? And, you know, it’s all for, it’s all about protecting the investors that trust us. And, you know, we look at everybody as if it’s our mother’s money.
Bill Fairman (27:59):
Some of it is.
Wendy Sweet (28:02):
We don’t want to make her mad.
Bill Fairman (28:03):
So Wendell had a great question. Hey, Wendell! I haven’t seen you in awhile. All right. So how do we calculate tax benefits and principal pay down as part of return, rate of return? You do, but it’s kind of two different questions. One would be oriented in lending money, and then the other one is being an equity member. So, the tax benefits, by the way, you’re not getting any tax benefits from being on the lending side of a fund investor. If you’re lending the fund money, there are no tax benefits, no matter what it is they’re investing in, you’re just a lender and you’re going to get ordinary income and that’s how you’re going to be treated tax wise at the end of every year, it’s just considered ordinary income. That said, if you do it in a tax deferred or tax exempt vehicles, such as an IRA, now you’re dealing with some tax benefits, but you’re creating them because of the entity that you’re lending in. It has nothing to do with the fund itself. On the other side of that with tax benefits, with depreciation and some expenses that can be passed through to the investor, that would be in a fund that is holding property and the, you know, the point of holding the property is to get those tax benefits and what do you use those tax benefits for are not necessarily your W2 income. If you have some on the side, this is those tax benefits are only going to help if you have other investment losses. So keep that in mind. And again, I’m not a CPA. I don’t play one on TV. Check with your CPA, but that’s the way, I’ve been told it works, but if you’re in a fund that holds properties, there are ways of, you know, I was telling you that you’d be subject to capital gains if they sold that property and paid you back. You can all always take that money and do a 10 31 exchange and get into another fund. That’s holding properties like that. You and then move that down the road and make your heirs pay the tax. Actually, I laugh about that, but you, your heirs, when you pass away, they can reset it and they don’t have to pay tax on it either.
Wendy Sweet (30:37):
Wendell has a lot of errors. Let me tell you, he’s got like 200 kids.
Wendy Sweet (30:42):
I hope that helped there.
Jonathan Davis (30:46):
Mark’s question. Have you seen, if I have an opportunity zone fund, would you be able to lend to my fund to purchase real estate? Short answer is no. Our fund cannot lend other funds, but we could lend on the real estate, we could be the debt component to the real estate and your fund could be the equity component, capturing the benefits of investing and buying a property in the opportunity zone.
Bill Fairman (31:11):
Yeah, our fund is not set up to do fund to fund investing. There are other funds that can do that. Ours just isn’t set up. So it’s not a rule that says a fund can’t do it just ours in particular can’t.
Wendy Sweet (31:29):
Do we know of any off the top of our hand that does lend to fund?
Wendy Sweet (31:36):
Yeah. Mike Slotnick?
Jonathan Davis (31:36):
Bill Fairman (31:36):
Wendy Sweet (31:36):
Bill Fairman (31:36):
Actually, way to find Mike is bigMike fund.com.
Jonathan Davis (31:44):
That’s Tempo Growth Fund, I believe is what it’s called. So Tempo Growth Fund.
Bill Fairman (31:48):
So he has Tempo Growth and Tempo Opportunity. I don’t know which fund does what, but the best way to find him as big Mikefund.com.
Wendy Sweet (31:56):
Yeah. There is is. Scott just put it in there. Tempo Growth Fund and we’ve had him on speak here.
Bill Fairman (32:03):
Yup. And we’ll have him back in back.
Wendy Sweet (32:06):
Mike is the smartest guy in the world. He’s big, old giant Russian guy.
Bill Fairman (32:11):
He’s a mathematician by trade and was in software, but his real passion was in real estate. So he picked the right venue.
Wendy Sweet (32:22):
No doubt. He’s great at it.
Bill Fairman (32:24):
So I hope that helps with the equity versus the lending. Essentially you’re going to land a fund money, or you’re going to be a part of the group of ownership, which is going to be their return is going to be based off the profit each quarter, not a rate of return that’s guaranteed if you’re a lender,
Jonathan Davis (32:50):
That’s one of the questions that you should ask before you get into any fund. When you’re talking to fund manager, is your phone leverage, or do you plan to leverage your fund?
Wendy Sweet (33:00):
Yeah. Great point, Jonathan.
Bill Fairman (33:00):
I will tell you that our documents allow us to do so because as a manager, you want to leave all your options open, but I can tell you we’ve never done it and we don’t intend to do it because we don’t believe in it. But frankly, when we started the fund, our documents were kind of a template and we were following the.
Wendy Sweet (33:23):
Bill Fairman (33:23):
Wisdom of the,
Wendy Sweet (33:27):
Fairway America. Oh yeah. Okay. So there’s, Mike’s website that you can go to. If you want to give him a shout for a say, a peek to invest in your fund.
Bill Fairman (33:40):
Yeah. If you have a good property that you’re doing, he’s very interested and it depends on what market you’re in as well. I’m assuming he’s not doing a lot in New York right now
Wendy Sweet (33:55):
And tell him you now, he’s really picky about who he deals with. So that part won’t hurt ya’ll.
Bill Fairman (33:59):
Yeah, in that case, don’t tell him, we know. But yeah, Jonathan’s correct, You should always be one of the questions when you’re looking at investing in a fund, are you leveraged and how much leverage do you have if you are?
Jonathan Davis (34:17):
Yeah. Is it, is it one-to-one two to one? I mean, there are some out there. I’m sure they’re not around now. They were, you know, 10 and 15 to one. I mean, that’s
Wendy Sweet (34:25):
Tell me what you mean by that. One-to-one two to one 10,
Jonathan Davis (34:29):
Every dollar the fund had, it was borrowing $10 if it’s 10 to one.
Bill Fairman (34:34):
That’s like margin calls. If you’re in stock, that’s like when you buy a house and you put no money down, you’re overleveraged if the values drop.
Jonathan Davis (34:46):
Yeah. You know, one-to-one two to, one’s not bad, but I mean, when you start getting three, four or five, you know, up that way, I mean, it’s, you know, it gets, for me, it gets a little scary. I probably couldn’t sleep at night with that.
Bill Fairman (34:59):
And frankly, the credit facility is not very intelligent if they’re learning that much, because let’s think about it. What collateral they going to use if the fund manager goes under.
Wendy Sweet (35:15):
Yeah, yeah. There’s nothing there. There’s absolutely nothing there. And I think another good question to ask, and I know, you know, that’s not really what this topic is, but you brought up that question. You need to ask that question about leverage. Another good question to really understand is what is that fund doing as a fund, you know, we don’t lend fund to fun and we don’t, we do that. Why did we not do that? Do you recall why we decided not to go?
Bill Fairman (35:50):
Because if you lend, all right, at the end of everything,
Wendy Sweet (35:52):
You can’t control what the other funds doing, right.
Bill Fairman (35:57):
That’s right. You lose control. Now, when I, the first thing I tell people that are asking whether it’s a good idea or a good fit for them to get into a fund, the first thing I ask them is, are you a control freak? Because if you are, you don’t want to be in a fund because you have no control. The manager has all their control.
Wendy Sweet (36:19):
Which means you need to trust them.
Bill Fairman (36:21):
So, as a manager, I have all the control. I don’t want to put money into something that I have no control over. So here’s what it boils down to is if I have a certain part of the investment in another fund, and that fund takes an extra two months to get W2’s, I’m sorry, K ones, tax documents, you’re having to wait on them. And then you, as investors are jumping all over us because you don’t have the documents you need at the end of the year, or you haven’t been able to close your books out because you’re waiting on somebody else, that’s why we’re not lending.
Wendy Sweet (37:02):
Or that fund might have leverage against it. You know, you never know, but understanding what that fund does to create its return. I think any fund that you’re investing in is really important.
Speaker 1 (37:16):
Well, and there’s noting wrong with fund to fund investing, as long as you as a fund manager, then your due diligence, and you’re doing business with, you know, knowledgeable upstanding folks. Yeah.
Wendy Sweet (37:29):
Yeah. And Mike Slotnick is definitely one that we trust completely and know that he’s really putting on.
Bill Fairman (37:35):
Yeah. And he does fund to fund investing and they invest in stuff that fairway American does and they’re very experienced. So it’s just as a smaller fund, I want to make sure that it’s my fault if stuff doesn’t get done. Not Somebody else.
Wendy Sweet (37:54):
Right. I’ll blame you.
Bill Fairman (37:55):
I want to be where the bus stops. Okay?
Wendy Sweet (37:56):
Yeah. For sure.
Bill Fairman (37:58):
I think we’ve beaten that dead horse, didn’t we?
Wendy Sweet (38:04):
We got another question we can ask.
Bill Fairman (38:06):
All right. This is going to be related more to the,
Wendy Sweet (38:13):
Bill Fairman (38:13):
Hey Marshall. Borrowing side of things. Go ahead.
Wendy Sweet (38:15):
Do we get another video to go along with this?
Bill Fairman (38:19):
We’re already doing that.
Wendy Sweet (38:21):
Okay, so this question,
Bill Fairman (38:32):
Wendy Sweet (38:32):
Thank you, Scott. I needed that. So this one is how does a bankruptcy, foreclosure, or forbearance affect my ability to qualify for a hard money loan? We’re not talking about conventional. We’re just talking about hard money loans. How does that affect? Depends, really, on what type of lender the hard money lender is.
Bill Fairman (38:57):
Well, let’s start with the first one. Bankruptcy. If you’re looking at a bankruptcy, what do you do? If you’re dealing with a borrower.
Wendy Sweet (39:05):
Okay. So, but I’m not an asset based lender. I’m a lender that I care about the asset, but I also care about the borrower’s ability to pay it back. That’s who we are.
Jonathan Davis (39:18):
You can’t see it behind me right here, but the five C’s of credit are right behind me on the board right here. Number one is character.
Wendy Sweet (39:25):
Yeah. Character is definitely one of them. So bankruptcy is, it depends. I can tell you, we don’t like it just like any bank wouldn’t like it. We want to know the circumstances. We want to know how far back in your life this occurred. So we’re going to get pretty, pretty tight about it, but somebody who’s an asset based lender may not care at all, right? So, Jonathan, what’s your thought on? I just got another alert from the storm.
Jonathan Davis (40:02):
Well, you know, it’s, for me, it’s the circumstances. What happened? What did the bar, what did they do? And when was it? Um, so, you know, if they’re a contractor and they have bankruptcy from, 2008, 9, 10, what contractor doesn’t?
Wendy Sweet (40:25):[Inaudible] 11, 13, you know,
Jonathan Davis (40:28):
Like if I see that, like, you know, that doesn’t, that doesn’t bother me. That doesn’t give me much pause. Now, if I see a bankruptcy, you know, inside of five years then, okay, I’m probably bringing in some more questions, like what happened, what was going on? And there are like Wendy said, some lenders are completely, you know, asset-based like, they will, they don’t, as long as they hit their LTV, they’re fine. They don’t really care. There’s others who do care and, but there are still ways around that. I mean, if there’s a bankruptcy, that’s new enough where it causes pause, we can create or you as the borrower ,to create a new entity only for that asset. And it would be an asset, a bankruptcy, remote entity. And that would be one way to kind of work around that. If, we thought that there was a higher risk of a bankruptcy, we probably wouldn’t do it, but to make us feel warm and fuzzy and able to sleep at night, we might throw that into a, you know, a bankruptcy remote entity so that we can not worry so much about that.
Wendy Sweet (41:42):
Right, right. Same thing with the, you know, let’s hit the foreclosure part. We don’t like foreclosures, do we?
Bill Fairman (41:54):
Because those are things we have to do occasionally.
Wendy Sweet (41:58):
Foreclosures are, are tough. I mean, in fact, in some cases, a foreclosure makes me feel a little more queasy than even a bankruptcy does. How are you feeling about that, Jonathan?
Jonathan Davis (42:13):
Yeah, again, you know, it comes down to what happened. I mean, if you got a loan from an asset based lender who one is your asset and they just foreclosed on you? Okay. You know, I can understand that now, if you got a loan from a bank conventional institution or a lender who doesn’t want the property back and they still had to take it back, that’s an issue. You know, I don’t like that.
Wendy Sweet (42:44):
No matter how far back it was, right?
Jonathan Davis (42:47):
Yeah. Yeah. I mean, there’s, again, there’s so many options that don’t end in foreclosure, like, did your property not have enough equity? Did you not know what you were doing? Did you not do what you were supposed to do? Why didn’t you do what you were supposed to do? The lender didn’t want the property and tried to draw, you know, we talked about this before, like we dragged borrowers to the finish line. Like, we do not want properties. So if there was a lender who was dragging you and still couldn’t get to the finish line, that’s an issue. I mean, we’ve had our share of borrowers that we try to drag to the finish line and couldn’t get them there. I mean, would we lend to them again? No, absolutely not. So, I mean,
Wendy Sweet (43:33):
And they’ve asked,
Jonathan Davis (43:37):
And they’ve asked, no, no. We’re not ready to do that.
Wendy Sweet (43:39):
That’s for sure. I do know though, from, I know a couple of people from back in 2008 that had like 30 properties foreclosed on. And they’re are people that I know that are good, solid folks that did everything they could to get, you know, their debt paid back as much as I could. But when you’re in undated with that many properties, it’s kind of hard to overcome. So, you know, we certainly would want to see, so what’s happened between then and now? Um, no. What have you done differently? How much money do you have in the bank? That’s a big question, right?
Jonathan Davis (44:18):
Yeah. I mean, for foreclosures, no one likes them. No one likes to see them, but there’s always a story and you know, like, like I just said, characters top of our list, what did you do? Like, what you did as the borrower and, you know, that story tells us a lot about what we can expect in the future, because like it or not, the only indicator of future behavior is past, that’s all we got.
Wendy Sweet (44:49):
That’s exactly right. We’ve had people that, you know, of course we foreclosed on that came along with us every step of the way that never went dark. Responded to all our phone calls that called us in advance before anything negative was even beginning to happen. That asked us for advice that, you know, those people were very grateful for, and then we’ve had the complete opposite. So we’ve only got like 10 minutes left Jonathan. And I think the most important word we’re talking about here in this sentence is forbearance. Talk a little bit about forbearance and what that really means and why it should be scary for people to go into forbearance.
Jonathan Davis (45:39):
Well, on the conventional society should be very scary, especially if you don’t need it which, you know, that’s a whole another conversation probably for another time, but, you know, on the conventional side, forbearance just means the lender is forbearing from pursuing default remedies, which just means foreclosure or, you know, whatever other remedies that that’s in the note, in the security instrument and they’re fore bearing to do so because of certain reasons, maybe it was, you know, maybe COVID-19, um, maybe you’ve experienced a financial hardship, you’ve just lost your job, whatever it may be. You know, the lender is choosing to forebear. Now on again, on the conventional side, when they do that, it’s not choosing to forebear without being repaid or choosing to forebear with pushing out your term, you know, instead of being, you know, you know, a 30 year term and you get a three month forbearance, it’s not a 30 year and three month term now. You have to pay those months back on the fourth. So when the fourth month comes, you don’t owe one payment, you owe four. So that’s an issue. And that can really hurt people. Now if, you’re getting a forbearance from your hard money, lender, private lender, whatever, whatever it may be, there’s probably a little more wiggle room. Flexibility might be a better word, flexibility on how that’s structured in, you know, I know we’ve done couple forbearances because of COVID-19 I know we did one on a movie theater that we have and we, you know, instead of being like the conventional lender where, Hey, we’ll give you three months, no payments. And on the fourth, you owe us all those payments. I think we understand that, like, we’ll take the movie theater, for example, it’s a income producing asset and it’s only income producing if people are going to it. Well, in North Carolina, there was a moratorium ongoing, you know, the governor banned, people going to movie theaters, it was weird because, and I get that beginning, but, you know, there was like bowling alleys open, but not movie theaters, which I don’t understand. But anyway, so, but instead of saying, Hey, on the fourth month you owe us all this, what we did was we just put that to the maturity and we can do that because we are short term lenders because the majority is only, you know, four, six months away, not 30 years away.
Bill Fairman (48:41):
The other reason too, is your conventional loans for the most part are sold, you know, they’re securitized and then sold on wall street. And then what happens if you modify the loan instead of forbearing, then you have to take it out of that,
Wendy Sweet (48:59):
Bill Fairman (48:59):
Securities pool, uh, which is a real pain in the butt. The lender has to take it back.
Jonathan Davis (49:07):
And by take it back, buy it back.
Bill Fairman (49:12):
They have to buy the thing back. They have to get it caught back up again and then re securitize it. But now you’re securitizing a loan that was not paying on time. You’re re securitizing a loan. That has been, what do they call that?
Wendy Sweet (49:30):[Inaudible].
Jonathan Davis (49:30):
Bill Fairman (49:30):
Re performing, which means it wasn’t performing at one time and now they have to sell it back at a lower price.
Wendy Sweet (49:36):
because it’s dented and scratched just like [Inaudible]
Jonathan Davis (49:40):
Yeah. There’s a whole industry built around that buying, scratch and dent alone, getting them ready to performing modified, and then reselling. I mean, you know, we can get into the numbers but it’s fun stuff.
Bill Fairman (49:49):
Why they can’t just do this? This is why. They don’t own the loan anymore. They may be servicing it, but it’s not their loan anymore.
Jonathan Davis (50:05):
I think, we’ve maybe mentioned this before about the forbearances. But if I could warn anyone on the conventional side, like if you don’t need a forbearance and don’t believe everything you see on TV. If you personally don’t need it, don’t get it. It’s not worth it. I don’t know the numbers in front of me. And we’ll know probably in the few months, I wonder though what those numbers are of how many distressed loans there are that were caused by forbearances, that didn’t need to happen.
Wendy Sweet (50:39):
Right. And understand that when it was over, you got to step up to the plate and pay the whole kitten caboodle. Or some of them will give you a certain time period to pay it, like over the three months that we come back, you need to have a caught up or however they’re going to set it up but it’s,
Jonathan Davis (50:58):
It’s still like the logically, it doesn’t even make sense to me. It’s like, I don’t have the ability to pay three months. Okay, good. Don’t pay that. But on the fourth month you owe four payments. Well, if I don’t have the ability to pay three months, how am I going to pay it all on the fourth?
Wendy Sweet (51:11):
That’s exactly right. If you go on unemployment for three months, and then you come back to work, you’re not getting a three months bonus when you come back to work.
Wendy Sweet (51:18):
Yeah. Normally. That’s not what happens.
Bill Fairman (51:22):
That forbearance thing is nuts
Jonathan Davis (51:25):
Yeah. But if you have a forbearance and, you know, a hard money loan. I mean, one of the things that we looked at when we’re looking, you know, if we’re talking forbearance, if we’re looking at the loan, we’re talking about a refinance that we would be refinancing. We don’t like to see it. I mean, if you are struggling to pay your obligations, unless unless somehow you got sucked into a 20% interest only loan, which then I would question your intelligence. But,
Bill Fairman (51:59):
Jonathan Davis (52:01):
Hey, well when you’re starting to get over 20, I think it starts to, rates starts to matter, You know, four and 12. It’s probably not, you know, for me, it’s not, it doesn’t really matter so much, but especially on value add stuff, but we’ve already had that discussion. But yeah, if you’re already struggling to pay, that’s an issue. Again, the only way you’re probably going to refinance, if you’re struggling is with an asset based lender who doesn’t care about your performance, because they’re hoping you fail
Bill Fairman (52:36):
Yeah, by the way, they’re not going to lend you very much money because they need to have a really good cushion.
Wendy Sweet (52:42):
Yeah. They want that. They want a strong equity.
Bill Fairman (52:43):
They want a good deal on that property. All right. So, this is unusual. I’m going to have to tell Jonathan to stop talking.
Jonathan Davis (52:51):
I was trapped in a car for so long. I was like, I wanna talk now.
Bill Fairman (52:57):
Thanks everybody for joining us again. The show is called Passive Income, Active Wealth. We are a lender. We are not an asset based, only lender. We are a hard money lender, but we,
Wendy Sweet (53:08):
We want a pay back.
Bill Fairman (53:11):
Yeah. That’s right. So if you’re a borrower interested in borrowing money, CarolinaHardMoney.com, click on the apply now tab. If you are an investor and you’re looking for a long-term passive gains, click on the investor tab. Don’t forget those share, like subscribe, hit the bell, all that good stuff. Have a wonderful day. We’ll see you soon.
Wendy Sweet (53:34):